Managing Financial Risk through Social Health Insurance: Welfare Effects of an Indian Health Insurance Scheme for the Poor

The theoretical appeal for social health insurance programs arises from their ability to reduce financial risk and improve health status. Limited empirical work focuses on financial risk, and the literature on effects on health status finds limited gains, even in developed countries (Levy and Meltzer 2004). Systematic reviews of health insurance in developing countries document limited gains in health and health care utilization although there is evidence of reduced out-of-pocket expenses (Acharya et al. 2013). While empirical work is beginning to look at the welfare effects of such reduction in out-of-pocket expenses in the context of various expansions of Medicare coverage in the US (see Finkelstein and McKnight (2008) or Englehardt and Gruber (2011)) there is limited evidence of the welfare effects of such schemes in developing countries.

We use the staggered roll-out of the Vajpayee Arogyashree Scheme (VAS), a social health insurance scheme for households below the poverty line in Karnataka, India, to study its impact on financial risk. VAS provides cash-less access to tertiary health care for poor households on 7 broad disease categories (about 450 procedures) through almost 200 empanelled hospitals in the state of Karnataka.  It was rolled out in 2010 in the north of the state and subsequently expanded to the remaining southern divisions late in 2012. Prior to the expansion of the program in the south, we collected data on either side of the roll-out boundary using a matched sampling strategy that matched villages on either side of the roll-out border using propensity score methods based off of census data. This sampling strategy allows us to identify the distribution of out-of-pocket costs for poor households who have access to VAS and compare it with the out-of-pockets costs of those without access to VAS. We show that village level covariates and individual level covariates are balanced on a very wide range of socio-economic and health infrastructure variables.

We find that access to VAS reduces out-of-pocket medical costs significantly for poor households. This effect is larger for poor households at higher quintiles of the out-of-pocket distribution medical cost (OOPMD) distribution– the OOPMD reduction at the 95^th percentile is more than 10 times the reduction in medical cost experienced at the median of the OOPMD distribution.  Following Finkelstein and McKnight (2008) we also quantify the welfare gains to society from these reductions in out-of-pocket medical costs due to VAS.