Subsidies at the BOP?
Cheikh Mbengue, an expert from Abt Associates on community-based health insurance (CBHI) schemes in Africa, said something that perked my ears last Wednesday at a USAID After Hours Seminar on microinsurance. He said that he thinks CBHIs can’t function effectively without subsidies. No one has really talked about subsidies in the BOP space. The message is always, “get prices down low enough, quality up high enough, distribution wide enough, and you’ve got a market at the BOP.”
In some instances, especially in fields with higher R&D, manufacturing, management, and labor costs like healthcare, extending the necessary suite of services to lower-income BOP may require government involvement, possibly with donor backing, in addition to entrepreneurialism, innovation, and investment.
Mbengue began the discussion by giving a brief history of CBHIs in Africa. In the 1990s, governments built up their health infrastructure, but facilities stood empty because people were too poor to pay for services. So individual communities resorted to creating their own insurance schemes, taking care of collection, management and disbursement on the community level. In 11 West and Central Africa countries, there were 76 schemes in 1999. By 2003, the total jumped to 366 schemes. Rwanda has been most successful in scaling insurance to the national level, and had 228 CHBIs by 2004 covering approximately 20% of the population.
An article in Development Outreach (WorldBank newletter) attributes Rwanda’s dramatic increase in CBHI coverage to the government’s strong and sustained support of insurance schemes nationwide; the government’s decision to allow local actors to determine CBHI designs; and subsidization of insurance coverage for the poorest through CBHI mechanisms. All levels of the government, from the Presidency to the Ministry of Health, to local officials have been involved in promoting CBHI schemes. And significantly, CBHIs make it possible for the poorest and indigent to benefit from coverage by subsidizing their participation through the help of NGO, grassroots, and government entities.
Mbengue explained why subsidization is necessary by comparing CBHIs to health insurance in developed countries, where employers pay a part of insurance premiums and governments provide coverage through national insurance programs. In Rwanda, where much of economic activity is still outside the formal economy, such insurance mechanisms are not yet possible, and standalone CBHIs are not able to stretch their limited resources far enough to cover the needs of all their members. These organizations reach a point where they must expand to mitigate risk and increase coverage, but their administrative capacity can’t grow to accomodate an expansion.
Michael McCord, another presenter at the USAID After Hours Seminar, summarized the microinsurance challenge: develop a premium structure that is low enough to be affordable yet high enough to meet the members’ coverage needs.
This conundrum is really at the heart of any enterprise serving the BOP: determine pricing that is low enough to be affordable, yet high enough to provide a living for the entrepreneurs involved. If the BOP’s ability to pay does not stretch quite as far as necessary, the question is how to calculate and cover that difference through government or donor subsidies, and how to modulate subsidization as ability to pay changes. This is not to dilute the primary importance of innovating business models and products/services. But sometimes, the right message might be, “get prices down low enough, quality up high enough, distribution wide enough and, if you don’t have a market at the BOP yet, get government/NGO/aid involved–THEN you’ll have a market at the BOP.”
Note: While subsidized pricing for low-income markets is an old concept among some practicioners–notably social marketers of health products like Population Services International, or DKT International–not as much exploration has occurred on how to leverage subsidies to enhance the financial sustainability of BOP initiatives by SMEs and multi-national corporations. There are, however, examples of “cross-subsidization” when organizations offer tiered pricing based on customer income (sliding scale fees). In these cases, the organization itself is essentially the subsidizer, and the availability of subsidies depends on market demand and not government or donor commitments.