Covering the Uncovered With Health Insurance in India

Executive Summary

India has employed four primary strategies to provide healthcare: strengthening government health services, expanding mandated health insurance for formal sector employees, publicly funded health insurance for the bottom 40% of the population, and voluntary health insurance for the affluent. However, a significant proportion of the population in the third and fourth quintiles remains uninsured. It has been argued that this uninsured population has the ability to pay (ATP) for healthcare, but it is unclear how much they can afford. A related question is whether they are willing to pay, even if they can afford it.

Since Universal Health Coverage (UHC) entails expanding access to affordable healthcare for everyone, examining the affordability [1] of healthcare, especially for the middle-income group [2], is crucial. This paper examines the affordability of healthcare—who can afford it and how much is affordable—for households in the third and fourth quintiles in India, taking into consideration the aspect of willingness to pay (WTP). Based on the affordability analysis, it attempts to identify reform options for UHC, one of which is to assess the health insurance premium that is affordable for middle-income groups in India.

The core question surrounding the debate on the Ability to Pay (ATP) has been whether the cost of healthcare for a household should be the sole criterion for ATP or if it should consider other factors that influence households’ decisions regarding healthcare expenditure.

Hancock’s concept (Hancock, 1993) has been extended to understand the affordability of healthcare and health insurance. Hancock suggested incorporating other merit goods [3], such as food, housing, and education, in the affordability analysis, defining the concept of healthcare affordability in the context of the consumption of these other merit goods. Russell (1996), on the other hand, distinguished between the ATP and the WTP. According to Russell (1996), a household’s decision regarding healthcare spending depends on a range of factors such as available resources, severity of illness, provider information, and awareness about illness. This implies that a household’s priorities, resources, and vulnerability together determine whether it will spend on healthcare (Russell, 1996). For this study, Hancock’s concept of ATP has been considered, as it is difficult to estimate WTP based on available datasets.

Based on Hancock’s analysis of affordability, there are four possible combinations of the two categories of goods, namely non-healthcare and healthcare, that can be consumed by the household. First, households that achieve a minimum level of consumption for both healthcare (6% of total household expenditure) [4] and non-healthcare (52% of total household expenditure) goods. Second, households that achieve a minimum level of consumption for non-healthcare goods, but the remaining resources do not allow them to achieve minimum standards of consumption for healthcare. Third, households that cannot achieve minimum consumption for both categories of goods. Fourth, households that achieve minimum standards of consumption for healthcare goods, but the remaining resources do not allow them to achieve minimum standards of consumption for non-healthcare goods.

The analysis reveals that less than 10% of the total households in the third and fourth quintiles are able to meet the minimum level of expenditure for both healthcare and non-healthcare goods. Most households have to choose one merit good over others. It is found that about half of the total households cut back on healthcare expenditure to achieve more than the minimum level of expenditure for other merit goods, such as food, housing, and education.

Since the household’s ATP varies, it becomes crucial to calculate the amount that households can allocate for their healthcare needs. The affordability calculation, applying threshold criteria (a minimum of 6% of total household expenditure for healthcare and 52% of total household expenditure for non-healthcare goods), suggests that 30% of households in the third and fourth quintiles spend less than 6% of their total household expenditure on healthcare. This means they can allocate a maximum of INR 5,693 [5] per year, including both inpatient and outpatient services. 8% of households with sufficient resources can expend a maximum of INR 24,466 [6] per year. For the remaining 62% of households, who can just afford to pay 6% of their household expenditure, they can pay about INR 13,344 to 15,132 per year.

Implications for Achieving UHC in India

The affordability analysis indicates that households in the third and fourth quintiles can allocate an average of INR 5,693 per year for their healthcare needs, encompassing both outpatient and inpatient services. As comprehensive health insurance coverage would necessitate a higher premium, two potential pathways exist to ensure healthcare services for middle-income households:

1. Leveraging the ATP of households in the third and fourth quintiles to enhance public financing and ultimately strengthen public facilities. This could be achieved through policies such as implementing user fees for services received at public facilities by middle-income households. Currently, services at public facilities are provided at a highly subsidised price consistently for households across all quintiles, irrespective of their ATP.
2. Introducing a contributory health insurance scheme, with contributions from both the government and households, for middle-income households to provide comprehensive services. This approach is particularly pertinent as private health insurance tends to be more expensive and exclusionary (Paul & Sarkar, 2023). A lower ATP (less than INR 5,693), adjusted for opportunity cost, for a significant proportion of households suggests that the government needs to contribute more than 50% of the total premium to encourage greater participation and achieve UHC in the long term.