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.

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