India faces a triple-disease burden of maternal and child health, infectious, and non-communicable diseases. This is despite India’s status as the third-largest economy in the world, with annual spending of over Rs6 trillion on healthcare on its 1.3 billion population.

What prevents India’s healthcare system from delivering world-class services, especially for the over 800 million people of rural India? India’s tax-based funding of healthcare is far too low and barely supports a government-owned health system which is almost exclusively focused on basic maternal and child health. Health insurance covers less than 5% of total health expenditure. The formal private network is a minuscule component of India’s health sector and is focused on secondary and tertiary care for urban India.

As a result, over 60% of healthcare expenditure in India is incurred by individuals whenever they seek care. Money is spent on seeking healthcare services from several informal providers and on purchasing large quantities of irrational medicines directly from pharmacies. As a result, India’s largely unorganized healthcare sector is focused on curing sick people rather than preventing sickness itself.

Healthcare has some peculiar features which makes it impossible for free-market solutions to work. Unlike other expenses, those on healthcare tend to have a high degree of variability and are most often unexpected. However, we humans have an innate tendency to not even think about our health until we get really sick. As a result, we do not buy health insurance, but are prepared to spend heavily on hospitals, while almost completely avoiding expenses on primary care and early diagnosis to treat incipient conditions. This is compounded by the fact that an average individual is not even aware of his/her health status and is completely dependent on the doctor or surgeon for medical advice.

Several countries have, therefore, not taken the path of free markets and have built high-performing health systems. A careful study reveals three essential principles that are central to the design of each of these successful health systems: pre-payment with pooling; concentrated purchasers with organized providers; and the government’s role as an active shaper and steward of the entire health system.

Pre-payment is the first principle. Countries have either used higher taxation levels to achieve this or have required residents to mandatorily purchase some form of health insurance. Britain is an example of a largely tax-financed health system while Germany is largely reliant on mandatory health insurance. Japan mandates citizens to enrol with one of its several insurers for universal coverage. The money thus collected is then aggregated into large pools which are able to absorb the high level of variability of health expenditure.

The second principle is that these pools are managed by one or more large agencies, which use pooled money to pay for healthcare for their members, and thereby discipline both providers and consumers. Britain uses public trusts, Germany sickness funds, Japan uses multiple insurers and Thailand adopts a single national health security office which buys only from primary care-led integrated providers. In several countries, there is a distinction between the roles of the purchaser of health services and the providers of healthcare. In such examples, a public trust or designated organization could receive pooled finances, acting as a purchaser. Providers could be a mix of public and private accredited facilities that compete for contracts based on high-quality services and on a capitation basis. Health insurers provide a wider suite of innovative products, covering outpatient and primary care. This enables the shift towards a futuristic healthcare design where payments to healthcare providers are based on achievement of outcomes.

The third and most crucial design principle in all effective health systems is that the government plays an active role in designing and supervising the entire health system, instead of focusing only on the management of a health system owned by itself.

Countries have taken these design principles and applied them to their own sociocultural context, as they deemed appropriate. By doing so, countries have shaped and organized an effective provider market over time, and have almost entirely eliminated healthcare-related hardships and impoverishment. Leading health systems, such as Thailand and the privately-owned Kaiser Permanente in the US, have gone one step further and now require providers to share the risk of the ill-health of the customer, thus ensuring that providers become sharply focused on customers’ well-being and continued good health.

Designing an effective health system of this type is an uphill yet achievable journey. In the 1960s, countries such as Thailand, Brazil and South Korea had health statistics similar to or worse than India’s in 2010, but transformed the status quo over four decades. In India, each state represents a different social, economic, and cultural environment, and will need a customized approach towards its health systems’ redesign.

However, there is no fundamental reason why each state cannot use these guiding principles to aspire to build a strong health system. It is clear from global experiences that for any country that has achieved successful reform of its healthcare system, these three core design principles have played a singular role, without relying on free markets.

Archana Srivatsan and Nachiket Mor are with the Bill and Melinda Gates Foundation. Views are personal.

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