Though I’ve noticed the similarities between healthcare and retail finance, the inherent conflicts of interest in the business models of the two snapped into focus as I watched the latest episode ofSatyamev Jayate. For those who did not tune in, the show focused on the conflict of interest in healthcare where doctors cut open healthy people to make money (prescribing a liver transplant where none was required and killing the patient was just one case), where commissions on laboratory testing drive private practice and kickbacks and gifts nudge the use of branded medicines on prescriptions instead of the generics that cost a fraction. While the manufacturer and the service provider collude, the patient suffers—both in terms of adverse health results (loss of life and body parts) and in terms of money.
It is not hard to see a mirror image of the problems that make healthcare sick in retail finance. Similar to the product manufacturer (insurance company, mutual fund, pension provider) is the equipment manufacturer and the pharma company, for whom the client is not the patient or consumer but the doctor or the distributor. If the doctor is the middleman between the patient and the firm, the banker and distributor plays that role in retail finance. Worryingly, despite being paid directly by the patient, the doctor is conflicted by the big money that pharma and the laboratory can throw at him. The similarities go on. Both sell complicated products that need the help of an expert who prescribes a solution—a treatment or a financial product. There is great deal of trust between the buyer of the service and the person selling it due to an information asymmetry.
Taking notice of this conflict of interest, regulation is creeping up in healthcare, though it is slowed down by the roadblocks that big pharma puts in place. In the disclose-and-inform regulatory environment of the US, the Physicians Payment Sunshine Act has been hanging fire since 2009. The Act aims as getting pharma companies to disclose what they pay doctors as incentives. In India, the parliamentary standing committee on health has given the go-ahead to ban all gifts to doctors and enforce a code of conduct that the healthcare industry has been avoiding implementing. The committee found the presence of commissions and gifts distorting medical behaviour and raising the cost for the patient. A similar story unfolds in retail finance, though the government is still far from seeing it with the lens as it has the conflicted practices in healthcare.
Retail finance consumers will have to wait awhile to get the attention of policymakers—it usually takes a scam with lots of zeros in it for that to happen. The zeros are there but just waiting to bubble up. Meanwhile, two possible learnings from the show that retail finance consumers can use. One, if there is a hard sell—a push to buy a product (like the fear factor that large corporate hospitals use to get the patient admitted), step back.
There is no product that will go away and not return. Use that time to get a second opinion. This is just as useful in medicine as it is it in finance. Don’t blindly believe the banker, the seller or whoever is telling you to do buy a product. Just as you can’t trust your doctor today, you cannot trust your financial service provider. Two, use generics. In medicine, a generic drug costs as little as one-tenth to one-fortieth of a branded product and doctors are loathe to prescribe generics and chemists hate to sell them for obvious reasons. Generics for consumers of financial products would be simple unbundled financial products. This would remove all two-in-one products such as investment-linked insurance from the table.
It would remove products that bundle a loan with insurance—I remember the vulture-like guy who sat in on my home loan application process. The deal done, he stepped in and asked me to sign on a home mortgage insurance that was 10 times the cost of a pure term cover. (No, I didn’t!) Generics in life insurance would be pure term plans that return nothing, not even the premium, if you survive but can pay out a large lump sum on death. It takes a little bit of a leap of faith to sign in for a product that returns nothing—but it works out. A home loan generic will be a simple base rate-linked loan with nothing on it. No embedded insurance cover—these can be bought much cheaper separately. In credit cards go for a no-fee international credit card with more than 30 days of payment period. Generics in mutual funds would be index funds and exchange-traded funds, except that managed funds are just as cheap and can form part of the choice set. So, don’t get pushed and if you don’t know enough about finance, stay with the simple generics.
Source: Live Mint