07-03-2022

Health Insurance
Dr T R Dilip,
International Institute for Population Sciences, Mumbai

MSP-E3.1: Health Economic and Financing

7th March 2022

Contents

• Introduction
• Principles of health insurance
• Risks in health insurance
• Current status of health insurance in India

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What is Health Insurance?

Health insurance is a method to finance healthcare.
Health insurance is a tool to minimize uncertainty –
• The uncertainty of illness
• The uncertainty of the cost of treatment

The ILO defines health insurance as “the reduction or elimination of the uncertain risk of loss for the individual
or household by combining a larger number of similarly exposed individuals or households who are included
in a common fund that makes good the loss caused to any one member” (ILO, 1996).

Health insurance
• Health insurance functions when there are large numbers enrolled
• With large numbers, the chances of adverse events are reduced and
so is the outflow from the insurance fund

• A health insurance programme usually has two main functions:

1. To increase access to healthcare
2. To protect households from high medical expenses at the time of illness

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Values in health Insurance

1. Solidarity: defined as “the awareness of unity and a willingness to
bear its consequences.” ie. people accept that the size of the return
may not match the resources they have put in the system.
2. Risk pooling / sharing: There is a sharing of risks between the high
risk and the low risk populations. (rich/poor; health/less healthy;
employed/unemployed; younger/older)
3. Equity: Under optimal conditions, health insurance is more
equitable than direct out-of-pocket payments and can be as
progressive as tax based financing
4. Participation / empowerment: Enhances collective negotiation and
empowerment of patient community in relation to insurance

Types of health insurances

• Social health insurance: A compulsory health insurance, usually for
the formal sector. Here the employees contribute through payroll
deductions and the employers provide a grant. This is used to finance
healthcare of the employees, their dependents
• Private health insurance: A voluntary health insurance wherein
people can enroll and purchase the insurance product of their liking,
paying a risk-rated premium.
• Community health insurance: A voluntary but not-for-profit health
insurance scheme and targeting the informal sector. These are usually
small schemes and the community is very involved in its
management.

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Basic Elements of a health insurance programme

• Community : Every health insurance scheme requires people to
contribute towards the health insurance fund. This could be in groups
(employees in formal sector, villages or social/income groups) or
random individuals (private health insurance)
• Providers: Health care can either be public or private providers
• Organiser: The organiser is the institution that manages the funds. It
could be an entity within the government, or a para-statal body, or a
private company or a voluntary organisation or even a community
based organisation.

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Premium in health insurance

• Premium is the amount collected from the insured.
• may be collected annually or monthly (as in pay roll deductions)
• Premium amount is determined by the size of the benefit package
• Premiums can also be voluntary or mandatory depends on the
scheme

Types of premium
Risk rated premium –insurer calculates the premium by the risk covered
o Different individuals pay different amounts for the same level of insurance coverage
o Those who need health care more are asked to pay more(equity issues)
o Private insurers usually use this type of premium for insuring individuals
Community rated premium –the insurer pools the risks of both groups of people
and charges a premium that reflects the average risk of illness
o Everybody shares the cost of illness equally
o More equitable than the risk rated premium
• Income rated premiums –premium is calculated according to the income levels
o The total premium collected is expected to cover the cost of the insurance programme.
o Usually prevalent in social health insurance
o Most equitable type of premium among the three categories

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Benefit package

Benefit package is the return for the contribution

• the benefit package increases, the premium also rises proportionately
• most private health insurance schemes usually exclude some
conditions from the cover
• Usually a benefit package contains events that are of low probability
(hospitalization)
• Some packages also cover high probability and low cost events (e.g.
outpatient visits)

Payments
Basically two ways of settling insurance claims
1. Third party payment mechanism, where the insurer pays directly to the
health care provider
• least burden for the patient
• Medical expenses reimbursement mechanism ( some private health
insurance schemes), where the patient pays the bills upfront and is
reimbursed by the insurer after submitting the bills and documents
• Disadvantageous as the patient has to make arrangements for paying the bill
• have repercussions on both access to health care and financial protection

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Kutzin (2001)

Imperfections or risks in health insurance market :

Adverse selection
• In principle we expect that both the healthy and sick would enroll in a
health insurance programme
• However, if poorly designed, there is a chance that the sick will enroll
in larger numbers as compared to the healthy
• Thus the insurance programme becomes unviable as the outflow
exceeds the inflow

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Managing risk of adverse selection

Eg: Insurance Regulatory and Development Authority (IRDA) Directives

Imperfections or risks in health insurance

market : Cream skimming
• occurs when insurance companies selectively choose low-risk
individuals and reject the high-risk individuals
• This is the opposite of adverse selection

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Imperfections or risks in health insurance

market : Cream skimming
• occurs when insurance companies selectively choose low-risk
individuals and reject the high-risk individuals.
• This is the opposite of adverse selection

Imperfections or risks in health insurance market : Moral Hazard

This takes place when the fact of being insured changes the behaviour
of the patient or the provider
1. Supply side moral hazard: the provider tends to intervene
unnecessarily or charge higher bills for an insured patient
2. Demand side moral hazard: The patient tends to demand more
care, or indulges in risky behaviour, because of the insurance status

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Managing risk of Moral Hazard

Size of health insurance sector in India

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Coverage of health insurance

• NFHS 5 (2019-20)- Households with any usual member covered under
a health insurance/financing scheme (%)
• Urban India- 38%
• Rural India- 42 %
• Total- 41%
• NFHS 4 (2015-16) 28.7 %

Health insurance as a financing scheme in India (2017-18)

• Government Health Insurance Schemes include Social insurance

schemes like ESIC, CGHS,ECHS (3.66% of Current Health Expenditure
(CHE))
• Government-based voluntary insurance schemes like RSBY (Now
PMJAY), state specific government health insurance schemes etc.
(1.88% of CHE)
• Private health insurance- eg: New India Assurance, ICICI Lombard, SBI
Medical Insurance (5.5% of CHE) [1.6 % in 2004-05]
• Community based insurance schemes(0.01%)
• Enterprises financing schemes (3.13%)

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Pradhan Mantri Jan Arogya Yojana (PMJAY)

• (PMJAY) was launched as a step towards Universal Health Coverage (UHC) by 2030
• Targets poorest 40 per cent of the population.
• Over 50 crore Indians are already covered under the scheme
• Insurance cover of Rs 5 lakhs per family.
• provides comprehensive hospitalisation cover for secondary and tertiary care
• National Health Authority (NHA) is the apex body responsible for
implementing PMJAY
• Work closely with Insurance Regulatory and Development Authority on development
and implementation of Health Insurance Regulations targeting insurance companies,
Third Party Administrators, hospitals and other stakeholders
• At the State level, State Health Agencies (SHAs) SHAs have full operational
autonomy over the implementation of the scheme in the State including extending
the coverage to non SECC beneficiaries

Voluntary Health Insurance Providers in India (IRDA ANNUAL REPORT 2020-21)

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Summary
1. Health Insurance is a method of health financing
2. Health Insurance is about pre-payment and risk pooling
3. Health Insurance has values like solidarity, equity, participation and empowerment
4. The framework and elements of Health Insurance
5. Three basic types of Health Insurance
6. Health insurance has some problems like adverse selection, moral hazard, fraud, cost
escalation etc.
7. Risk pooling coverage for hospitalization increasing in India

Exercise III
Choose one among the following four health insurance schemes and write a one pager
on scope and coverage and potential of the schemes in contributing to equity in access
to health care and financial protection in India.
Employees’ State insurance Scheme (ESIS)
Central Government Health Scheme (CGHS)
Pradhan Mantri Jan Arogya Yojana (PMJAY)
Health insurance from The New India Assurance Co. Ltd.

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Resources
Insurance Regulatory and Development Authority (IRDA) “Handbook on
Health Insurance”
https://www.nhp.gov.in/sites/default/files/pdf/health_insurance_handbook.
pdf New Delhi: IRDA
Institute of Public Health & Ministry of Health and Family Welfare. Training
manual in health insurance (with facilitator’s guide). World Health
Organization Country Office for India, New Delhi, 2009.
https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B
xp4UKSObSs9MmMxZTM1MjUtMTZjZi00MmYyLWJmM2MtMmZhMzFmM2Jl
MmYy&hl=en_US
Kutzin, J., 2001. A descriptive framework for country-level analysis of health
care financing arrangements. Health policy, 56(3), pp.171-204.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.470.2073&rep=r
ep1&type=pdf

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