In the past decade, health spend per capita in India has tripled, while the overall share of health funded by the government has only increased by 4%. To frame in the Indian healthcare payments problem, this means that in a country of 1.3 billion people, more Indians are left footing heftier medical bills. With commercial insurance penetration hovering at a mere 2-3%, those bills are predominantly paid out-of-pocket.

“Modicare”, the Indian government’s recently announced scheme to provide health coverage for India’s poorest families, would only alleviate out-of-pocket costs for roughly a third of the population.

If unaddressed, the healthcare payments problem is unsustainable for several reasons. First, the rise of chronic and lifestyle diseases will further exacerbate healthcare demand and costs. Second, high out-of-pocket spend puts Indian families at risk. The Health Ministry of India estimates that over 63 million people are pushed into poverty each year due to catastrophic health expenses. Finally, a lack of primary risk-bearing entity, either public or private, means there is little financial incentive to drive patients toward preventative and cost-effective care.

Traditional Insurers – growth curbed by the lack of data

We estimate that Indians currently spend over $60B on out-of-pocket healthcare expenses. Given this staggering figure, why hasn’t private insurance risen to meet what is clearly an unmet need in the market? The answer essentially boils down to data – or rather lack thereof it.

Data is the lifeblood of insurers because it enables them to effectively underwrite and pay out claims. Yet in India, where there are over 196,000 hospitals spread over 29 states, there is no centralized nor digitized equivalents of interoperability, electronic health records, or health information exchanges. Furthermore, the vast majority of healthcare providers have paper-based records. Data is nearly inaccessible to insurers. This is in part why the insurance plans that currently exist typically only cover inpatient care within a narrow network of high-end hospital chains that have developed more sophisticated electronic systems.

Start-ups are leading the charge to fill the data gap

Despite these challenges, tech-enabled start-ups in India are building out unique solutions to develop healthcare data infrastructure, laying the foundation for broader healthcare coverage.

For example, e-pharmacy players such as Lifcare and Pharmeasy are building vertically-integrated pharmacies enabled by data and technology. Their business models leverage e-prescription capabilities to accumulate data on patient health and enable more convenient access to drugs. As these players scale, their data and care delivery capabilities could serve as key building blocks for pharmacy benefits management, or enabling new insurance models such as pharmacy-based outpatient primary care coverage (OPD).

Other start-ups are taking the approach of building out technology-enabled provider networks to lay the groundwork for insurance. Practo leverages its practice management suite embedded in over 100,000 provider offices to enable sharing of patient records and processing of claims for insurance-covered visits. mFine, headed by former Myntra leadership, is partnering with the most trusted clinics and hospitals within a region to create hyperlocal care delivery networks. mFine members pay a subscription fee to gain preferential access to services at mFine’s partner hospitals, as well as access to outpatient services provided on mFine’s platform such as tele-consults and medication delivery.

Challenges with Scale, Integration, and Incentives Lie Ahead

The quest to enable broader health insurance coverage by these start-ups is, however, fraught with challenges. E-pharmacy players will need to integrate data and workflow with other providers, such as physicians and labs, in order to develop full underwriting capabilities for outpatient coverage. Provider network development, on the other hand, is a far more data-rich strategy but one that is operationally challenging to scale geographically, especially beyond the largest cities.

Consumer behaviour and market education also need to be addressed. Many Indians don’t feel the need for insurance, despite the rising costs of healthcare. The concept of paying in advance for services that may or may not be rendered is challenging in a largely pay-as-you-go environment. As a result, some companies are offering pre-paid packages covering a set amount of services at a discount, or health savings plans for expensive planned procedures, with the goal of converting these customers to insurance products down the road.

Finally, the insurance business model thrives when provider and payer incentives are aligned toward delivering quality, cost effective care. However in India’s fee-for-service dominated system, aligning incentives can prove difficult (as it has in other historically privatized healthcare systems like the US). Expect more innovative care and payment models, such as direct primary care and outcomes-based reimbursement, to evolve as insurance gains broader adoption in coming years.

We predict that the Indian healthcare market will move to a model of private insurance over time, starting with modularized coverage such as hospitalization benefits, outpatient benefits, defined packages, and savings plans for episodes of care. As data becomes more ubiquitous, helped by technology start-ups, private out-of-pocket spend will increasingly shift toward commercial insurance models. We expect that by 2020 private spend will grow to $100B, and 10% of this spend will have migrated from out-of-pocket to insured coverage.

Written by Hailey Hu, an Investor at B Capital Group.