Institute for Social and Economic Change

Working Paper: 330

Out-Of-Pocket (OOP) Financial Risk Protection:
The Role of Health Insurance

Amit Kumar Sahoo
S Madheswaran



Though health has been considered a fundamental human right since the Alma Ata Declaration in 1978, still a significant proportion of world population don’t get access to basic healthcare simply due to their inability to pay. With the increasing incidence of life style diseases, advent of new healthcare technology and privatisation of healthcare, cost of healthcare has increased manifolds and become unaffordable to many. More people end up spending catastrophic sums and often adopt inefficient mechanisms like borrowing, selling of valuable assets and even curtailing children’s education to finance health spending in LDCs like India. Hence, government has to play a major role in health financing. Keeping fiscal constraints in mind, governments in recent years have been promoting health insurance as a viable solution for promoting efficiency and equity in the health care sector. However, a little is known if health insurance indeed reduces healthcare burden (catastrophic expenditure) and impoverishment. Hence, this paper seeks to estimate the effect of insurance on out-of-pocket health expenditures, using Indian Human Development Survey (IHDS, 2004-05) and appropriate econometric techniques like, two-part and logit model. Our findings suggest that health insurance reduces the degree of OOP health expenditure, probability of catastrophic expenditure and impoverishment. Hence, the recent introduction of health insurance programme by various state and central governments is a welcome move. We argue that health insurance should be universalised rather than targeted to the BPL families alone since catastrophic expenditure is faced not only by poor HHs but also by higher percentage of HHs from rich income quintiles. The logic behind targeting of BPL families and their selection is evidently flawed as it excludes the genuinely needy beneficiaries from the ambit of insurance cover. Interestingly the study found that the probability of incurring catastrophic expenditure and impoverishment increases almost equally on account of both outpatient and inpatient expenditure. However, most of the health insurance schemes in India either government or privately provided are of inpatient oriented, leaving a large part of OOP expenditure not covered under the scheme. Hence, there is need of rethinking on the design of health insurance to make both government and private provided insurance scheme more attractive and effective.

Working Papers