India’s healthcare system faces significant challenges in affordability and accessibility, particularly for middle- and
lower-income groups. The rising costs of high-quality medical care, coupled with limited health insurance penetration, often leave individuals vulnerable to substantial out-of-pocket expenses. These challenges are further exacerbated when addressing high-cost treatments and post-retirement healthcare needs.
To bridge this gap, effective financial tools are needed to empower individuals and families to manage healthcare costs efficiently. Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs) present a promising solution. These mechanisms, widely adopted in countries like the United States, could play a transformative role in India’s healthcare financing system, offering a pathway to enhance affordability and financial security.
Understanding HSAs and HDHPs
Health Savings Accounts (HSAs) are tax-advantaged savings accounts designed to help individuals save specifically for medical expenses. Funds contributed to these accounts are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses. Importantly, unused funds roll over year to year, allowing individuals to build a financial cushion for future healthcare needs.
High Deductible Health Plans (HDHPs), on the other hand, are insurance plans with lower premium costs but higher deductibles. These plans encourage policyholders to pay for initial medical expenses out-of-pocket up to a certain threshold, fostering cost-consciousness in healthcare spending.
Together, HSAs and HDHPs incentivise individuals to save for medical expenses while giving them access to more affordable insurance options. This synergy can make healthcare more accessible and financially sustainable.
Potential Benefits for India
1. Enhancing Affordability and Accessibility
HSAs and HDHPs have the potential to reduce the financial burden of healthcare in India. By enabling individuals to save for future medical needs during their working years, HSAs promote a culture of financial preparedness. These savings could significantly alleviate post-retirement healthcare expenses, addressing a critical gap in India’s current financial planning landscape.
HDHPs, paired with HSAs, could make health insurance more accessible by offering lower premium costs, providing a viable option for both employers and individuals. This mechanism could reduce the reliance on out-of-pocket payments, which currently account for a significant share of healthcare expenditure in India.
2. Reducing Out-of-Pocket (OOP) Expenses
India’s OOP healthcare expenditure accounts for nearly 60% of total healthcare spending—among the highest globally. HSAs can directly reduce this burden by enabling individuals to save for predictable and routine medical expenses. Over time, accumulated savings in HSAs can serve as a financial buffer, reducing dependence on loans or informal borrowing for healthcare needs.
3. Fostering Financial Preparedness and Retirement Planning
India’s aging population faces a critical gap in post-retirement healthcare financing. HSAs can help bridge this gap by encouraging individuals to save for medical needs during their working years. Unlike traditional savings instruments, HSAs provide a tax-advantaged, healthcare-specific savings option, offering a secure mechanism to plan for rising medical costs in retirement.
4. Encouraging Preventive Care
The structure of HSAs and HDHPs inherently promotes preventive care. Since individuals have a direct financial stake in managing their healthcare expenses, they are more likely to adopt cost-conscious behaviors and prioritise preventive measures. Regular check-ups, early diagnosis, and lifestyle changes are likely to gain traction, contributing to long-term health improvements and reduced medical costs.
5. Strengthening the Healthcare Financing System
Introducing HSAs and HDHPs in India could bolster the healthcare financing ecosystem. By channeling savings into HSAs, banks could mobilise substantial deposit bases, enhancing liquidity in the financial system. These funds, when invested prudently, could generate returns that benefit account holders while contributing to broader economic growth.
Additionally, a sustainable healthcare financing model based on these mechanisms could ease the pressure on government-funded health schemes, creating a complementary system that serves a wider population effectively.
Implementation Considerations
For HSAs and HDHPs to succeed in India, several implementation aspects must be addressed. Banks could play a pivotal role by setting up and managing HSAs, incentivised by favorable tax treatments. These accounts could be structured to allow flexible contributions from individuals and employers, ensuring accessibility across diverse income groups.
Tax exemptions on contributions, withdrawals, and growth within HSAs would further enhance their appeal, encouraging widespread adoption. However, concerns about the impact on traditional insurance plans need to be addressed, ensuring that these mechanisms complement rather than compete with existing options.
The Path Forward
1. Policy Recommendations
The government should permit banks to establish HSAs with attractive tax benefits, creating a viable savings platform for healthcare. Simultaneously, HDHP options could be introduced as an alternative or supplement to traditional insurance plans, expanding consumer choice.
2. Public-Private Collaboration
A coordinated effort between the public and private sectors is essential to drive adoption. Private insurance providers, banks, and government agencies can collaborate to design user-friendly products and ensure their availability across urban and rural areas.
3. Building a Culture of Savings and Preventive Care
Public awareness campaigns and educational initiatives are crucial to shift public perception. Emphasising the long-term benefits of savings and preventive care can encourage individuals to proactively plan for their healthcare needs.
4. HSA and Missing Middle
Health Savings Accounts (HSAs) paired with High Deductible Health Plans (HDHPs) can be an effective solution for the “missing middle” demographic (NITI Aayog definition), typically consisting of individuals who earn too much to qualify for government assistance but not enough to afford comprehensive private insurance. While the government may manage programs aimed at the base of the pyramid and elderly populations, HSAs with HDHPs provide an effective mechanism for middle-income individuals to save, plan, and access the care they need without overburdening public healthcare systems. This structure allows for a more balanced distribution of healthcare resources across different income levels, ensuring that those who fall between the gaps are not left behind.
HSAs and HDHPs represent a promising avenue to mitigate healthcare costs and reduce out-of-pocket expenses in India. By enhancing affordability, fostering preventive care, and strengthening the financial system, these tools can transform the healthcare landscape. With strategic policy support and robust implementation, India can take a significant step toward creating a more accessible and financially sustainable healthcare system.
– Ashok Kumar, Chief Strategy & Distribution Officer, MediBuddy
