Healthcare takes Centre Stage, Finally! | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


CHAPTER
05
"It is health that is real wealth and not pieces of gold and silver.”
—Mohandas K. Gandhi
The recent COVID-19 pandemic has emphasised the importance of the healthcare sector 
and its inter-linkages with other key sector of the economy. The ongoing pandemic has 
showcased how a healthcare crisis can get transformed into an economic and social 
crisis. First, while key learnings need be gleaned from the current health crisis, healthcare 
policy must not become beholden to “saliency bias”, where policy over-weights a recent 
phenomenon that may represent a six-sigma event that may not repeat in an identical 
fashion in the future. To enable India to effectively respond to future pandemics, the health 
infrastructure must be agile. Second, given its potential to provide healthcare access in 
remote areas, telemedicine needs to be harnessed to the fullest by especially investing in 
internet connectivity and health infrastructure. Third, the National Health mission (NHM) 
has played a critical role in mitigating inequity as the access of the poorest to pre-natal and 
post-natal care as well as institutional deliveries has increased significantly. Therefore, 
in conjunction with Ayushman Bharat, the emphasis on NHM should continue. Fourth, 
an increase in public spend from 1 per cent to 2.5-3 per cent of GDP – as envisaged in 
the National Health Policy 2017 – can decrease the Out-Of-Pocket Expenditures from 65 
per cent to 30 per cent of overall healthcare spend. Fifth, as a bulk of the healthcare in 
India is provided by the private sector, it is critical for policymakers to design policies 
that mitigate information asymmetry in healthcare, which creates market failures and 
thereby renders unregulated private healthcare sub-optimal. Therefore, information 
utilities that help mitigate the information asymmetry can be very useful in enhancing 
overall welfare. The Quality and Outcomes Framework (QOF) introduced by the National 
Health Service (NHS) in the United Kingdom 2004 as well as other quality assessment 
practices in various countries provide good examples in this context. A sectoral regulator 
to undertake regulation and supervision of the healthcare sector must be considered 
given the market failures stemming from information asymmetry; WHO also highlights 
the growing importance of the same. The mitigation of information asymmetry would also 
help lower insurance premiums, enable the offering of better products and help increase 
the insurance penetration in the country.
Healthcare takes centre stage, 
finally!
Page 2


CHAPTER
05
"It is health that is real wealth and not pieces of gold and silver.”
—Mohandas K. Gandhi
The recent COVID-19 pandemic has emphasised the importance of the healthcare sector 
and its inter-linkages with other key sector of the economy. The ongoing pandemic has 
showcased how a healthcare crisis can get transformed into an economic and social 
crisis. First, while key learnings need be gleaned from the current health crisis, healthcare 
policy must not become beholden to “saliency bias”, where policy over-weights a recent 
phenomenon that may represent a six-sigma event that may not repeat in an identical 
fashion in the future. To enable India to effectively respond to future pandemics, the health 
infrastructure must be agile. Second, given its potential to provide healthcare access in 
remote areas, telemedicine needs to be harnessed to the fullest by especially investing in 
internet connectivity and health infrastructure. Third, the National Health mission (NHM) 
has played a critical role in mitigating inequity as the access of the poorest to pre-natal and 
post-natal care as well as institutional deliveries has increased significantly. Therefore, 
in conjunction with Ayushman Bharat, the emphasis on NHM should continue. Fourth, 
an increase in public spend from 1 per cent to 2.5-3 per cent of GDP – as envisaged in 
the National Health Policy 2017 – can decrease the Out-Of-Pocket Expenditures from 65 
per cent to 30 per cent of overall healthcare spend. Fifth, as a bulk of the healthcare in 
India is provided by the private sector, it is critical for policymakers to design policies 
that mitigate information asymmetry in healthcare, which creates market failures and 
thereby renders unregulated private healthcare sub-optimal. Therefore, information 
utilities that help mitigate the information asymmetry can be very useful in enhancing 
overall welfare. The Quality and Outcomes Framework (QOF) introduced by the National 
Health Service (NHS) in the United Kingdom 2004 as well as other quality assessment 
practices in various countries provide good examples in this context. A sectoral regulator 
to undertake regulation and supervision of the healthcare sector must be considered 
given the market failures stemming from information asymmetry; WHO also highlights 
the growing importance of the same. The mitigation of information asymmetry would also 
help lower insurance premiums, enable the offering of better products and help increase 
the insurance penetration in the country.
Healthcare takes centre stage, 
finally!
151 Healthcare takes centre stage, finally!
INTRODUCTION
5.1 The health of a nation depends critically on its citizens having access to an equitable, 
affordable and accountable healthcare system. Health affects domestic economic growth 
directly through labour productivity and the economic burden of illnesses (WHO 2004). 
Increasing life expectancy from 50 to 70 years (a 40 per cent increase) could raise the 
economic growth rate by 1.4 percentage points per year (WHO 2004). As Figure 1 shows, life 
expectancy in a country correlates positively with per-capita public health expenditure. Figure 
2 shows that maternal mortality correlates negatively with increases in per-capita public health 
expenditure. 
Figure 1: Life expectancy correlates positively with per-capita 
governmentspending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
Figure 2: Maternal mortality correlates negatively with per-capita 
government spending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
Page 3


CHAPTER
05
"It is health that is real wealth and not pieces of gold and silver.”
—Mohandas K. Gandhi
The recent COVID-19 pandemic has emphasised the importance of the healthcare sector 
and its inter-linkages with other key sector of the economy. The ongoing pandemic has 
showcased how a healthcare crisis can get transformed into an economic and social 
crisis. First, while key learnings need be gleaned from the current health crisis, healthcare 
policy must not become beholden to “saliency bias”, where policy over-weights a recent 
phenomenon that may represent a six-sigma event that may not repeat in an identical 
fashion in the future. To enable India to effectively respond to future pandemics, the health 
infrastructure must be agile. Second, given its potential to provide healthcare access in 
remote areas, telemedicine needs to be harnessed to the fullest by especially investing in 
internet connectivity and health infrastructure. Third, the National Health mission (NHM) 
has played a critical role in mitigating inequity as the access of the poorest to pre-natal and 
post-natal care as well as institutional deliveries has increased significantly. Therefore, 
in conjunction with Ayushman Bharat, the emphasis on NHM should continue. Fourth, 
an increase in public spend from 1 per cent to 2.5-3 per cent of GDP – as envisaged in 
the National Health Policy 2017 – can decrease the Out-Of-Pocket Expenditures from 65 
per cent to 30 per cent of overall healthcare spend. Fifth, as a bulk of the healthcare in 
India is provided by the private sector, it is critical for policymakers to design policies 
that mitigate information asymmetry in healthcare, which creates market failures and 
thereby renders unregulated private healthcare sub-optimal. Therefore, information 
utilities that help mitigate the information asymmetry can be very useful in enhancing 
overall welfare. The Quality and Outcomes Framework (QOF) introduced by the National 
Health Service (NHS) in the United Kingdom 2004 as well as other quality assessment 
practices in various countries provide good examples in this context. A sectoral regulator 
to undertake regulation and supervision of the healthcare sector must be considered 
given the market failures stemming from information asymmetry; WHO also highlights 
the growing importance of the same. The mitigation of information asymmetry would also 
help lower insurance premiums, enable the offering of better products and help increase 
the insurance penetration in the country.
Healthcare takes centre stage, 
finally!
151 Healthcare takes centre stage, finally!
INTRODUCTION
5.1 The health of a nation depends critically on its citizens having access to an equitable, 
affordable and accountable healthcare system. Health affects domestic economic growth 
directly through labour productivity and the economic burden of illnesses (WHO 2004). 
Increasing life expectancy from 50 to 70 years (a 40 per cent increase) could raise the 
economic growth rate by 1.4 percentage points per year (WHO 2004). As Figure 1 shows, life 
expectancy in a country correlates positively with per-capita public health expenditure. Figure 
2 shows that maternal mortality correlates negatively with increases in per-capita public health 
expenditure. 
Figure 1: Life expectancy correlates positively with per-capita 
governmentspending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
Figure 2: Maternal mortality correlates negatively with per-capita 
government spending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
152 Economic Survey 2020-21   V olume 1
5.2 Increased prioritization of healthcare in the central and state budgets is important as it 
crucially impacts how much protection citizens get against financial hardships due to out-
of-pocket payments made for healthcare (WHO 2010). OOP for health increase the risk of 
vulnerable groups slipping into poverty because of catastrophic health expenditures (O’Donnell 
et al. 2007; Berki 1986; van Doorslaer et al. 2006). Figure 3 shows that at low levels of public 
health expenditure, i.e. were public healthcare expenditure as a per cent of GDP is less than 
3 per cent, OOP expenditure as a share of total health expenditure drops precipitously when 
public health expenditure increases. For instance, an increase in public health expenditure from 
the current levels in India to 3 per cent of GDP can reduce the OOP expenditure from 60 per cent 
currently to about 30 per cent. 
Figure 3: Small increase in public health expenditure 
can drastically reduce OOP expenditure
Source: WHO (Global Health Expenditure Data Base)
5.3 In fact, an increase in government healthcare spending over a decade in varied countries 
such as China, Indonesia, Philippines, Pakistan and Thailand significantly decreased the out-of-
pocket expenditures of its citizens (Smith et al, 2020).
GIve N SIGNIFICa NT Ma RKe T Fa Il URe S, Heal THCa Re Nee DS 
Ca Re FUl Sy STe M De SIGN
5.4 Healthcare systems do not self-organise using the force of free markets because of three key 
inherent and unchanging characteristics (Arrow, 1963): (i) uncertainty/variability of demand; 
(ii) information asymmetry; and (iii) hyperbolic tendencies. Hence, any active system design of 
healthcare must be mindful of these inherent characteristics.
Uncertainty/variability of demand
5.5 The need for health care is driven often by factors that cannot be controlled or predicted. 
This is also coupled with the nature of demand, which is inelastic especially for emergency care. 
Page 4


CHAPTER
05
"It is health that is real wealth and not pieces of gold and silver.”
—Mohandas K. Gandhi
The recent COVID-19 pandemic has emphasised the importance of the healthcare sector 
and its inter-linkages with other key sector of the economy. The ongoing pandemic has 
showcased how a healthcare crisis can get transformed into an economic and social 
crisis. First, while key learnings need be gleaned from the current health crisis, healthcare 
policy must not become beholden to “saliency bias”, where policy over-weights a recent 
phenomenon that may represent a six-sigma event that may not repeat in an identical 
fashion in the future. To enable India to effectively respond to future pandemics, the health 
infrastructure must be agile. Second, given its potential to provide healthcare access in 
remote areas, telemedicine needs to be harnessed to the fullest by especially investing in 
internet connectivity and health infrastructure. Third, the National Health mission (NHM) 
has played a critical role in mitigating inequity as the access of the poorest to pre-natal and 
post-natal care as well as institutional deliveries has increased significantly. Therefore, 
in conjunction with Ayushman Bharat, the emphasis on NHM should continue. Fourth, 
an increase in public spend from 1 per cent to 2.5-3 per cent of GDP – as envisaged in 
the National Health Policy 2017 – can decrease the Out-Of-Pocket Expenditures from 65 
per cent to 30 per cent of overall healthcare spend. Fifth, as a bulk of the healthcare in 
India is provided by the private sector, it is critical for policymakers to design policies 
that mitigate information asymmetry in healthcare, which creates market failures and 
thereby renders unregulated private healthcare sub-optimal. Therefore, information 
utilities that help mitigate the information asymmetry can be very useful in enhancing 
overall welfare. The Quality and Outcomes Framework (QOF) introduced by the National 
Health Service (NHS) in the United Kingdom 2004 as well as other quality assessment 
practices in various countries provide good examples in this context. A sectoral regulator 
to undertake regulation and supervision of the healthcare sector must be considered 
given the market failures stemming from information asymmetry; WHO also highlights 
the growing importance of the same. The mitigation of information asymmetry would also 
help lower insurance premiums, enable the offering of better products and help increase 
the insurance penetration in the country.
Healthcare takes centre stage, 
finally!
151 Healthcare takes centre stage, finally!
INTRODUCTION
5.1 The health of a nation depends critically on its citizens having access to an equitable, 
affordable and accountable healthcare system. Health affects domestic economic growth 
directly through labour productivity and the economic burden of illnesses (WHO 2004). 
Increasing life expectancy from 50 to 70 years (a 40 per cent increase) could raise the 
economic growth rate by 1.4 percentage points per year (WHO 2004). As Figure 1 shows, life 
expectancy in a country correlates positively with per-capita public health expenditure. Figure 
2 shows that maternal mortality correlates negatively with increases in per-capita public health 
expenditure. 
Figure 1: Life expectancy correlates positively with per-capita 
governmentspending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
Figure 2: Maternal mortality correlates negatively with per-capita 
government spending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
152 Economic Survey 2020-21   V olume 1
5.2 Increased prioritization of healthcare in the central and state budgets is important as it 
crucially impacts how much protection citizens get against financial hardships due to out-
of-pocket payments made for healthcare (WHO 2010). OOP for health increase the risk of 
vulnerable groups slipping into poverty because of catastrophic health expenditures (O’Donnell 
et al. 2007; Berki 1986; van Doorslaer et al. 2006). Figure 3 shows that at low levels of public 
health expenditure, i.e. were public healthcare expenditure as a per cent of GDP is less than 
3 per cent, OOP expenditure as a share of total health expenditure drops precipitously when 
public health expenditure increases. For instance, an increase in public health expenditure from 
the current levels in India to 3 per cent of GDP can reduce the OOP expenditure from 60 per cent 
currently to about 30 per cent. 
Figure 3: Small increase in public health expenditure 
can drastically reduce OOP expenditure
Source: WHO (Global Health Expenditure Data Base)
5.3 In fact, an increase in government healthcare spending over a decade in varied countries 
such as China, Indonesia, Philippines, Pakistan and Thailand significantly decreased the out-of-
pocket expenditures of its citizens (Smith et al, 2020).
GIve N SIGNIFICa NT Ma RKe T Fa Il URe S, Heal THCa Re Nee DS 
Ca Re FUl Sy STe M De SIGN
5.4 Healthcare systems do not self-organise using the force of free markets because of three key 
inherent and unchanging characteristics (Arrow, 1963): (i) uncertainty/variability of demand; 
(ii) information asymmetry; and (iii) hyperbolic tendencies. Hence, any active system design of 
healthcare must be mindful of these inherent characteristics.
Uncertainty/variability of demand
5.5 The need for health care is driven often by factors that cannot be controlled or predicted. 
This is also coupled with the nature of demand, which is inelastic especially for emergency care. 
153 Healthcare takes centre stage, finally!
Given this uncertainty and variability at the individual level, pooling of healthcare expenditures 
via health insurance can help to reduce healthcare risk at the macroeconomic level.  
Information asymmetry
5.6 In healthcare markets, Arrow (1963) explained that buyers of information (patients) rarely 
know the value of the information until after it is purchased and sometimes never at all. For 
example, when individuals avail of a healthcare service like dermatology (i.e., skin care), they 
may be able to readily evaluate the outcome. Therefore, for such services, low-quality providers 
will have to reduce their price to remain competitive. In contrast, patients who must undergo 
open-heart surgery may find it very difficult to evaluate its quality and have to therefore rely 
on the reputation of the hospital/doctor as a proxy for the quality. For some services such as 
preventive care and/or mental health, patients may never know for sure whether their provider 
did a good job. 
5.7 This principal-agent relationship between the patient (as the principal) and the healthcare 
provider (as the agent) gets further complicated by factors that may influence this conflict of 
interest. For instance, altruism among doctors – a trait that is highly commended and looked 
for by patients – primarily serves to eliminate this conflict of interest. However, reimbursement 
rates pre-negotiated with insurance companies, advertising, the private incentives for testing, 
etc. can exacerbate this conflict of interest. For instance, C-sections in pregnancies, which are 
more profitable for the hospital/physician, are overused (Guilmoto et al, 2019). Such non-price 
features of healthcare can lead to obfuscation of price and/or significant price dispersions for the 
same good/service. 
5.8 Health insurance, which becomes desirable because of the uncertainty/variability in 
demand, creates a second round of informational problems in healthcare markets. First, because 
health insurance covers (some of) the financial costs that would be caused by poor health 
behaviour, individuals may have less incentive to avoid them; this phenomenon is labelled ex-
ante moral hazard (Ehrlich and Becker 1972). Pauly (1968) argued about the role of ex-post 
moral hazard in health insurance, which stems from the fact that the cost of an individual’s 
excess usage of healthcare is spread over all other purchasers of insurance. This free-rider 
problem causes the individual to not restrain his usage of care. Given the ex-ante and ex-post 
moral hazard, incomplete insurance in healthcare is optimal. This prediction is consistent with 
the idea advocated by Holmstrom (1979) that optimal insurance contracts should be incomplete 
to strike a balance between reducing risk and maintaining incentives for the individual.
5.9 As Akerlof (1970) predicts, when little information is available on the quality of a product 
prior to purchase, and the quality of the product is uncertain, quality deteriorates to the lowest 
level in an unregulated market. While reputation can partially mitigate this market failure, the 
design of healthcare systems must account for this market failure, which can otherwise lead to 
loss of consumer faith and resultant under-investment in healthcare.
Hyperbolic tendencies
5.10 People tend to indulge in risky behavior that may not be in their self-interest. Examples 
include smoking, eating unhealthy food, delay in seeking care, not wearing masks or keeping 
Page 5


CHAPTER
05
"It is health that is real wealth and not pieces of gold and silver.”
—Mohandas K. Gandhi
The recent COVID-19 pandemic has emphasised the importance of the healthcare sector 
and its inter-linkages with other key sector of the economy. The ongoing pandemic has 
showcased how a healthcare crisis can get transformed into an economic and social 
crisis. First, while key learnings need be gleaned from the current health crisis, healthcare 
policy must not become beholden to “saliency bias”, where policy over-weights a recent 
phenomenon that may represent a six-sigma event that may not repeat in an identical 
fashion in the future. To enable India to effectively respond to future pandemics, the health 
infrastructure must be agile. Second, given its potential to provide healthcare access in 
remote areas, telemedicine needs to be harnessed to the fullest by especially investing in 
internet connectivity and health infrastructure. Third, the National Health mission (NHM) 
has played a critical role in mitigating inequity as the access of the poorest to pre-natal and 
post-natal care as well as institutional deliveries has increased significantly. Therefore, 
in conjunction with Ayushman Bharat, the emphasis on NHM should continue. Fourth, 
an increase in public spend from 1 per cent to 2.5-3 per cent of GDP – as envisaged in 
the National Health Policy 2017 – can decrease the Out-Of-Pocket Expenditures from 65 
per cent to 30 per cent of overall healthcare spend. Fifth, as a bulk of the healthcare in 
India is provided by the private sector, it is critical for policymakers to design policies 
that mitigate information asymmetry in healthcare, which creates market failures and 
thereby renders unregulated private healthcare sub-optimal. Therefore, information 
utilities that help mitigate the information asymmetry can be very useful in enhancing 
overall welfare. The Quality and Outcomes Framework (QOF) introduced by the National 
Health Service (NHS) in the United Kingdom 2004 as well as other quality assessment 
practices in various countries provide good examples in this context. A sectoral regulator 
to undertake regulation and supervision of the healthcare sector must be considered 
given the market failures stemming from information asymmetry; WHO also highlights 
the growing importance of the same. The mitigation of information asymmetry would also 
help lower insurance premiums, enable the offering of better products and help increase 
the insurance penetration in the country.
Healthcare takes centre stage, 
finally!
151 Healthcare takes centre stage, finally!
INTRODUCTION
5.1 The health of a nation depends critically on its citizens having access to an equitable, 
affordable and accountable healthcare system. Health affects domestic economic growth 
directly through labour productivity and the economic burden of illnesses (WHO 2004). 
Increasing life expectancy from 50 to 70 years (a 40 per cent increase) could raise the 
economic growth rate by 1.4 percentage points per year (WHO 2004). As Figure 1 shows, life 
expectancy in a country correlates positively with per-capita public health expenditure. Figure 
2 shows that maternal mortality correlates negatively with increases in per-capita public health 
expenditure. 
Figure 1: Life expectancy correlates positively with per-capita 
governmentspending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
Figure 2: Maternal mortality correlates negatively with per-capita 
government spending on health (centre and state combined)
Source: World Bank and WHO (Global Health Expenditure Data Base)
152 Economic Survey 2020-21   V olume 1
5.2 Increased prioritization of healthcare in the central and state budgets is important as it 
crucially impacts how much protection citizens get against financial hardships due to out-
of-pocket payments made for healthcare (WHO 2010). OOP for health increase the risk of 
vulnerable groups slipping into poverty because of catastrophic health expenditures (O’Donnell 
et al. 2007; Berki 1986; van Doorslaer et al. 2006). Figure 3 shows that at low levels of public 
health expenditure, i.e. were public healthcare expenditure as a per cent of GDP is less than 
3 per cent, OOP expenditure as a share of total health expenditure drops precipitously when 
public health expenditure increases. For instance, an increase in public health expenditure from 
the current levels in India to 3 per cent of GDP can reduce the OOP expenditure from 60 per cent 
currently to about 30 per cent. 
Figure 3: Small increase in public health expenditure 
can drastically reduce OOP expenditure
Source: WHO (Global Health Expenditure Data Base)
5.3 In fact, an increase in government healthcare spending over a decade in varied countries 
such as China, Indonesia, Philippines, Pakistan and Thailand significantly decreased the out-of-
pocket expenditures of its citizens (Smith et al, 2020).
GIve N SIGNIFICa NT Ma RKe T Fa Il URe S, Heal THCa Re Nee DS 
Ca Re FUl Sy STe M De SIGN
5.4 Healthcare systems do not self-organise using the force of free markets because of three key 
inherent and unchanging characteristics (Arrow, 1963): (i) uncertainty/variability of demand; 
(ii) information asymmetry; and (iii) hyperbolic tendencies. Hence, any active system design of 
healthcare must be mindful of these inherent characteristics.
Uncertainty/variability of demand
5.5 The need for health care is driven often by factors that cannot be controlled or predicted. 
This is also coupled with the nature of demand, which is inelastic especially for emergency care. 
153 Healthcare takes centre stage, finally!
Given this uncertainty and variability at the individual level, pooling of healthcare expenditures 
via health insurance can help to reduce healthcare risk at the macroeconomic level.  
Information asymmetry
5.6 In healthcare markets, Arrow (1963) explained that buyers of information (patients) rarely 
know the value of the information until after it is purchased and sometimes never at all. For 
example, when individuals avail of a healthcare service like dermatology (i.e., skin care), they 
may be able to readily evaluate the outcome. Therefore, for such services, low-quality providers 
will have to reduce their price to remain competitive. In contrast, patients who must undergo 
open-heart surgery may find it very difficult to evaluate its quality and have to therefore rely 
on the reputation of the hospital/doctor as a proxy for the quality. For some services such as 
preventive care and/or mental health, patients may never know for sure whether their provider 
did a good job. 
5.7 This principal-agent relationship between the patient (as the principal) and the healthcare 
provider (as the agent) gets further complicated by factors that may influence this conflict of 
interest. For instance, altruism among doctors – a trait that is highly commended and looked 
for by patients – primarily serves to eliminate this conflict of interest. However, reimbursement 
rates pre-negotiated with insurance companies, advertising, the private incentives for testing, 
etc. can exacerbate this conflict of interest. For instance, C-sections in pregnancies, which are 
more profitable for the hospital/physician, are overused (Guilmoto et al, 2019). Such non-price 
features of healthcare can lead to obfuscation of price and/or significant price dispersions for the 
same good/service. 
5.8 Health insurance, which becomes desirable because of the uncertainty/variability in 
demand, creates a second round of informational problems in healthcare markets. First, because 
health insurance covers (some of) the financial costs that would be caused by poor health 
behaviour, individuals may have less incentive to avoid them; this phenomenon is labelled ex-
ante moral hazard (Ehrlich and Becker 1972). Pauly (1968) argued about the role of ex-post 
moral hazard in health insurance, which stems from the fact that the cost of an individual’s 
excess usage of healthcare is spread over all other purchasers of insurance. This free-rider 
problem causes the individual to not restrain his usage of care. Given the ex-ante and ex-post 
moral hazard, incomplete insurance in healthcare is optimal. This prediction is consistent with 
the idea advocated by Holmstrom (1979) that optimal insurance contracts should be incomplete 
to strike a balance between reducing risk and maintaining incentives for the individual.
5.9 As Akerlof (1970) predicts, when little information is available on the quality of a product 
prior to purchase, and the quality of the product is uncertain, quality deteriorates to the lowest 
level in an unregulated market. While reputation can partially mitigate this market failure, the 
design of healthcare systems must account for this market failure, which can otherwise lead to 
loss of consumer faith and resultant under-investment in healthcare.
Hyperbolic tendencies
5.10 People tend to indulge in risky behavior that may not be in their self-interest. Examples 
include smoking, eating unhealthy food, delay in seeking care, not wearing masks or keeping 
154 Economic Survey 2020-21   V olume 1
social distancing in the context of the pandemic. Such individual behavior may not only be sub-
optimal for the individual but also create negative externalities for the entire healthcare system 
through higher costs and poorer outcomes. Typically, consumers tend to demand primary care 
less than the economically optimal levels as the price elasticity for this product/service is very 
high. For instance, among TB patients in Delhi who initially visited a qualified practitioner in 
2012, the average length of time from when TB symptoms first appeared to when they reached 
a DOTS facility was 5.2 months (Kapoor et al, 2012). Similarly, India has very low rate of 
screening for cancers among women in the age bracket of 15-49 years at 22 per cent for cervical 
cancer, 10 per cent for breast cancer and 12 per cent for oral cancer when compared to 62 per 
cent, 59 per cent and 16 per cent respectively in OECD Countries (NFHS 4 and OECD 2015). In 
fact, the privately optimal preference for primary care may be so low that individuals may have 
to even be paid to use adequate primary care. Individuals also under-estimate health risks and 
may, therefore, not purchase adequate health insurance.  
Need for system design in healthcare
5.11 Given these market failures, a free market where individual consumers purchase services 
from providers on their own while paying at the point of service leads to severely sub-optimal 
outcomes including demand that can be influenced and induced by suppliers, over-seeking of 
hospitalization and under-seeking of primary care/public health when compared to economically 
optimal levels, and catastrophic out-of-pocket spending in part due to the low preference for 
health insurance. Therefore, most well-functioning health systems are structured as oligopolies 
purchasing from oligopsonys instead of individual consumers purchasing from individual 
providers. The structure of the market has substantial implications for long term trajectory of the 
health system. Countries with more fragmented health systems tend to have lower performance 
as reflected in higher costs, lower efficiency, and poor quality. Therefore, in addition to providing 
healthcare services and financing healthcare, a key role for the government is to actively shape 
the structure of the healthcare market. 
COv Id-19 a Nd I Nd Ia’s Hea Lt HCare POLICy 
5.12 Following the COv ID-19 pandemic, a key portfolio decision that healthcare policy must 
make is about the relative importance placed on communicable versus non-communicable 
diseases. The COv ID-19 pandemic has spread worldwide because it is a communicable disease. 
The previous such pandemic occurred more than a century back when the Spanish Flu pandemic 
devastated the world in 1918. As pandemics represent rare events, healthcare policy can become 
a victim of “saliency bias”, which involves over-weighting recent phenomena. 71 per cent of 
global deaths and about 65 per cent of deaths in India are caused by non-communicable diseases 
(NCDs) (Figure 4, Panel a). Between 1990 and 2016, the contribution of NCDs increased 37 per 
cent to 61 per cent of all deaths (National Health Portal, n.d.). Further, preventing communicable 
diseases requires focus on better sanitation and drinking water, which the Swachh Bharat and 
the Har Ghar Jal Abhiyan campaigns are focusing on.