Sunday, December 28, 2008

My life in Microfinance

So I never really posted anything about microfinance, and honestly, I probably never will. In all honesty, it's interesting to read about in the NY times or similar, but to spend six months invested in nothing but can be a dreadful bore, what with all the talk of interest rates, variable repayment schedules on so-on. Nor is it it the silver bullet against poverty. In brief, it is an approach with incredible promise in extending the package of services we can offer the world's poor in pursuit of sustainable development, but we understand ridiculously little of how it works (the jury is even out on interest rates, too high, too low, do the poor even understand the notion of an interest rate, etc.), and we'll need to wait at least ten years (I think), until studies coming down the research pipeline, from institutes such as the one I used to work at (Center for Microfinance/Poverty Action Lab).

As part of my cop-out, I'm pasting in an article that my colleagues and I recently wrote for an economics quarterly. It neatly summarizes the project I worked on. Cheers ;)

Health insurance for India’s poor: All for one, one for Five Dollars

How should a society organize limited resources to finance healthcare for its citizens? A tough question, with many potential answers. An even tougher question might be how a poor society, with 600 million people living on under $2 a day, should finance its healthcare.

The Indian government has opted for a publicly funded health system, but limited by resources, and further burdened by its own corruption and bureaucracy, it has struggled to meet its population’s needs. While vertical programs have achieved some degree of success in combating diseases such as polio and tuberculosis, community health programs meant to address broader issues are less successful. Patients with other illnesses (e.g. hypertension) find government clinics and hospitals overworked, and under-resourced. To help fill this void, non-governmental organizations have stepped forward with their own solutions, but coverage is hardly universal, and often relies on capricious donor funding that only accounts for 2.3% of health expenditure in India1.

When government public health systems and NGO services are inadequate or unreachable, poor households often turn to fee-levying and generally unregulated private providers. These private providers typically offer decent care (though a substantial number of medical quacks operate in this space), at premium prices. Ultimately, households are the major financing source, accounting for 72% of total health expenditure, and moreover, since a very small percentage of households have health insurance, 98% of household healthcare spending is out-of-pocket2. This burden is particularly felt by low-income households, which are vulnerable to illnesses and their corresponding economic shocks.

Challenges at the household level
Take for example Fatima Begum, standing outside her small two bedroom hut in rural Karnataka. A diminutive, but noisy woman in her forties, Fatima relates a sobering story of her family’s health. It starts three months ago with her joint pain and a visit to a local government clinic; the prescribed medication from the visit achieved no improvement, and so Fatima visited additional clinicians. Rolling her eyes and smiling, she relates how her husband, Mohammad, suddenly experienced chest pain around the same time (Mohammed grunts to confirm the veracity of this account), and fearing for his life, the family rushed to hospitalize him in a nearby city, where he spent a night under supervision. Add illnesses of one of their children to this bill of health, and you arrive at 22,000 Indian rupees (INR), about $460, spent over the last three months. This is a staggering sum for a poor household which likely earns about INR 2,000 – 5,000 a month ($20-$50). Indeed, the family was unable to finance its healthcare needs through savings, and progressively borrowed money from relatives, then money-lenders, and eventually, resorted to selling household assets to avert complete ruin.

Can microfinance institutions play a positive role?
Enter PRATHAK Microfinance3, one of the major players in the Indian microfinance industry. Out in the dusty Deccan, not far from where Fatima lives, PRATHAK is exploring the use of a health insurance scheme among poor households. Fatima is already an PRATHAK client, having previously taken out a small loan to purchase livestock. However, had she renewed her loan, she could have chosen among several new health insurance options, which range from insuring only herself to insuring herself and up to four immediate family members. An insurance package, costing about 500 Rupees, insures families up to 20,000 Rupees. Insured individuals either obtain medical care with a provider of their choice and then file for reimbursement, or go to “network” hospitals where they receive care at no cost—a “cashless” claim. Had Fatima opted for family coverage, the policy would not have paid for all of her expenses, but it certainly could have covered the most expensive item, her husband’s hospitalization, at INR 15,000.

PRATHAK is not entirely unique among microfinance institutions (MFIs) in considering the implementation of insurance products. Globally, the microfinance industry has matured considerably from its early days, when Mohammed Yunus and the Grameen bank were considered audacious. Loans and savings products are increasingly well-understood, and improved technologies are facilitating the delivery of financial services to developing country households once considered “unbankable.” A few MFI giants have even crossed the controversial threshold of profitability, which to some is the critical indicator of sustainability.

As the microfinance industry has matured globally, it looks for new products to sustain its meteoric growth, and for many insurance products represent the new frontier. For some such products are means of gaining competitive advantage, as certain regions of the world now see unprecedented levels of competition for customers amongst MFIs. Other MFIs are exploring insurance products as a means of insuring their own portfolios; if clients can be protected from income shocks related to adverse events of weather, health and other uncertainties, they are more likely to repay their loans and invest the money in income generating ventures or assets (as opposed to smoothing capital requirements during health shocks). And finally, many pursue insurance based on moral imperatives.

However, economists have long understood that healthcare, and health insurance, function uniquely as commodities, and as such, can cause market-based solutions to malfunction badly, leading to market failures. Actually, some would say this is exactly the case in America, which relies on private insurance markets to provide health coverage. Terms familiar from a Principles of Economics course ring true in this respect: asymmetric information, moral hazard and adverse selection can limit the effectiveness of private health insurance.

In this respect, MFIs possess some unique characteristics that may make them unusually well-suited to deliver health insurance, and potentially sidestep such issues. PRATHAK makes health insurance mandatory for clients taking new loans, thus averting adverse selection. (Avoiding adverse selection, though highly important from an insurer’s perspective, can make an MFI vulnerable to competition. When MFIs are competing against other lenders, they risk losing clients who do not wish for a health insurance product, or to pay a premium, with their loan.) Moreover, large MFIs often serve millions of clients, providing a critical mass to make the risk-pooling required for health insurance feasible. Finally, MFIs have already developed the distribution networks necessary to service clients taking out loans (often on a weekly basis), and this infrastructure could easily lend itself to sustaining health insurance schemes.

The PRATHAK Experience: Challenges in Implementation
Nonetheless, PRATHAK faces many challenges. Behavioral economics tells us that people do not allocate their incomes rationally and that the poor are particularly vulnerable to the consequences of this irrationality.4 Anecdotal evidence—witnessed by the authors themselves—suggests that PRATHAK clients do not understand their health insurance. For example, they do not understand the purpose of paying money upfront for health care, which they later may or may not need later. PRATHAK worries that the mandatory nature of the health insurance program might decrease its primary business—small group loans for enterprise development. However, other insurance products, such as life insurance, have been successful nationwide in India thanks to strong government backing. Similarly, before PRATHAK can scale up its program, increased financial literacy and a standardized method for encouraging financial literacy at the community level are needed. Another issue involves reimbursement; some of PRATHAK’ clients complain that the filing process is too long and technical.

Administering health insurance in rural India also presents PRATHAK with many operational difficulties. The geographical distance between the client and the insurer causes great delays in reimbursements: the claims must travel from the client in her village, to her loan officer, then to PRATHAK headquarters in Hyderabad and finally to the third-party insurer in Mumbai for final processing. Reimbursements must travel the same route in the other direction. As a result, reimbursement claims initially took up to 6 months. PRATHAK says they have streamlined this process to less than one month.

Another operational difficulty that PRATHAK has encountered is finding “network” hospitals. These hospitals are advantageous because they do not require the client to pay any upfront costs, and PRATHAK can assure both quality and a reasonable cost to the insurer ahead of time. However, identifying hospitals in rural areas that meet the insurer’s standards has been difficult.

The Verdict is Out
Despite these complications, MFIs like PRATHAK are well-positioned to offer health insurance to the poor. Insurance requires a large base of people, and large MFIs have that base. MFIs have already successfully developed life insurance programs, and health insurance is the next natural step in the expansion of services. Moreover, the poor, who suffer enormously from health shocks, stand to benefit hugely from a health insurance product.

An important step in confirming its feasibility will be the use of rigorous evaluation. The authors of this article are currently running a five-year evaluation of PRATHAK’ health insurance product as a joint collaboration of the Centre for Micro Finance and MIT’s Poverty Action Lab. Respectively, these institutions are committed to conducting action-based research for microfinance and development interventions. Results of rigorous trials from such organizations will help verify if health insurance through MFIs can succeed (the authors certainly think it can), and if so, help identify the major hurdles to making it a success.

Poor societies, and poor households, such as those in India, face difficult choices in parceling out their income. Health is often not a priority until it becomes a calamity, but leaving individuals to pay out-of-pocket is too risky. In India, 24% of the population falls below the poverty line due to hospitalization. Indeed, health is vital to breaking poverty traps, and in countries such as India, where the government’s role is limited by resources and corruption, private solutions can help improve poor families’ access to health coverage. Through their unique delivery channels and large base of clients, major players in microfinance are well situated to help achieve that objective. Microfinance has already chalked up considerable success with its loans; perhaps it can score further gains with health insurance.

Update on me and Mumbai

First a quick personal update:

I’ve been accepted to a couple medical schools, but haven’t decided where to go. I don’ t need to, and likely won’t, decide till May 15th, so there’s no rush.

In the interim, I’ve quit my job (’s becoming a recurring theme for me to hand in a resignation every 6 months), and for now, I have 6 weeks off to enjoy my last few days in India. I’m relishing my time off (being a bum is highly underrated), and have a list of things to do (travel, self-improvement, family visits), that bears resemblance to that of a retiree (sans grandchildren). Some highlights from the next weeks: trips to Goa/Bombay, and Calcutta/Darjeeling/Sikkim, cooking lessons in Hyderabadi cuisine, exercise to shed the excess baggage gained thanks to the latter cuisine, and time with my crazy Jihadi family.

In anticipation of my own laziness, I’ve signed up for a new job that will only last 5 months, and entails 15 hours/week of work for a comfortable paycheck and accommodation included (in my, surely irrelevant, opinion, it’s not about working hard or smart, but working less ;). An important detail about the job: it involves teaching Chinese tikes how to speak English in Suzhou, a city located one hour from Shanghai. China features a booming job market in Teaching English as a Foreign Language jobs for native speakers, and recruits the same from the US/UK/Australia. I can’t help but think they’ll feel cheated when a brown guy shows up, no matter how clearly nasally American my accent.

Ok, update done

My blog is experiencing a bit of an identity crisis, given my relatively stationary existence since returning from my SE Asian adventure, but I recently read “Freakonomics” and one of the pleasures of the book was it’s distinct lack of theme. In that vein, I give up on trying to make this blog about anything more specific than the meanderings of my own perverse sense of curiosity. With that I give you an update on the Mumbai bombings:

I was recently in Mumbai for a lavish wedding hosted by Parsi friends of the family. It was a sumptuous affair, rife with glittering attire, sparkling small talk, and all the trappings of “Mumbai Society.” In short, it was trippy, trippy fun, given how utterly removed I am from any sort of “elite”. I felt like a millionaire playboy for a couple days, instead of a post-college bum...
However, the wedding also offered a chance to interact with some of the social elite of Mumbai, and understand how the recent attacks had played themselves out in the city’s psyche; I was particularly well-situated for this purpose, given the wedding’s location in South Bombay, where the targets of the attack were located.

In a nutshell, the mood was sober. Unlike many of the terrorist attacks in recent history, this one had hit the elite (a striking parallel to the 9/11 attacks), as the Taj Mahal Hotel and Trident occupy a central location in the social constellations of the the city rich and/or famous (one graduate of Mumbai’s elite Cathedral school told me he knew many of the victims, and that his family lunched at the Taj two or three times a week). For many, Christmas and the upcoming New Year’s celebrations will be decidedly low-key.

The attacks attracted disproportionate attention given their high profile targets (note, the attack at the Victoria Terminus, also a Mumbai landmark, but one frequented by a relatively pedestrian crowd, received considerably less press, and I’m about to committ the same sin in writing about the Taj Mahal hotel).

Incidentally, I visited the Taj Mahal Hotel the day after it re-opened, an astonishing three weeks after the attack. The management had done a spectacular job! Photos of the hotel from the attack were no less than a visual metaphor for the nature of strike, the well-appointed lobby riddled with random bullet holes, and smeared with blood. However, the lobby into which I stepped that day evidenced the attacks only by way of a temporary Tree of Life memorial, featuring the names of the dead. Apart from that, a few stores had been walled off, but very professionally, to the point where you would’ve only known had you visited the hotel earlier (I had).

My mom and I hadn’t come as terror tourists (though there were a fair share of those), but to visit the famous Gazdar Jewelry shop, where my family has frequently struck gold in finding rare and exquisite antique jewelry (shameless pun, I’m sorry); this trip was both to look for more, and to show our solidarity with the owner. The shop’s owner, an old family friend, waxed lyrical of the Tata heirs role in quickly rebuilding the hotel. He said the speech given at the re-opening speech the previous day was surprisingly moving, and Tata himself was moved to tears while thanking the hotel’s staff for their individual acts of courage, which certainly saved lives that day. Interestingly, I repeatedly heard Tata referenced in the ensuing days, by numerous Mumbaikers. It would appear that just as NYC collectively narrated its own patriot mythologies in the days following 9/11, the 26/11 attacks in Mumbai had curiously fixed Tata in the role of the fearless leader (akin to Guiliani in NYC). In a way, I think it quite appropriate. The Taj is certainly an elitist symbol, but its history can certainly be a source of national pride. In 1903’s, Jamsedji Tata had visited Watson's, then Mumbai’s most lavish hotel. He was turned away for being Indian, and vowed to build a hotel so magnificent and classic, he would neatly turn the snub on its head (note: there is considerable speculation that this story is apocryphal, and I'm inclined to believe it is, but what is history but a fable agreed upon). Regardless of his motivations, he undoubtedly built a hotel worthy of Mumbai: the Taj is undoubtedly a remarkable piece of Mumbai history, and in a sense, a symbol of Indian self-reliance (it’s also about as classy a “Fuck You” Tata could’ve offered his would be detractors). Its quick renovation following the attacks deepens it role a symbol of Indian defiance, this time, in the face of terrorism.

On that note, Indians have a remarkable threshold for chaos, and with it, terrorism. While America threw the relative equivalent of a national hissy fit in the wake of 9/11 (and not unrightly), most Indians regarded the 26/11 attacks with directed exasperation (the government screwed up royally, most feel), and an almost spiritual patience.

Finally, some Indians simply took no note at all. One of my cousins, a member of South Mumbai upwardly mobile youth (he’s an I-banking analyst, one of the increasingly rare few who still has a job), smoked himself silly with his friends on Mumbai’s finest hash. When I asked him with measured gravity (lest I upset him and his friends), about whether the attacks were directly traumatic, he replied with an irreverent grin: “Traumatic? Are you kidding? I fucking partied!....a two day vacation in the middle of the week. It was fricking sweet, I was high the whole time.”

Though not as classy as Tata’s retort, I suppose that’s as big a “Fuck You” to the terrorists as any.