Athesis Submitted To The University Of Magalore For Award Of The Degree Of Degree Of Doctor Of Philosophy In Economics

Health Insurance Schemes in India: An Economic Analysis of Demand Management under Risk Pooling and Adverse Selection A Thesis Submitted to the University of Mangalore for Award of th

Health Insurance Schemes in India:

An Economic Analysis of Demand

Management under Risk Pooling and

Adverse Selection

A Thesis Submitted to the University of Mangalore for Award of

the Degree of Doctor of Philosophy in Economics

By Sukumar Vellakkal

Research Supervision by

Gopal K Kadekodi

Professor and Former Director, ISEC

INSTITUTE FOR SOCIAL AND ECONOMIC CHANGE

N A G A R A B H A V I, B A N G A L O R E -5 6 0 0 7 2 , I N D U

December 2007

This small piece o f work is dedicated

INSTITUTE FOR SOCIAL A N D ECONOMIC CHANGE

N a g a rb h a v i PO: BA N G A LO RE-560 072

D E C L A R A TIO N

I hereby declare that the present thesis titled ‘Health Insurance Schemes in India: An Economic Analysis of Demand M anagement under Risk Pooling and Adverse Selection’ is a result o f the original research undertaken and carried out by me under the guidance and supervision of Prof Gopal K Kadekodi, Professor and Former Director o f Institute for Social and Economic Change (ISEC), Bangalore

I have properly acknowledged the sources from which I may have borrowed ideas 1 declare that the material of the thesis has not formed, in any manner, the basis for awarding of any Degree or Diploma previously o f University of Mangalore or any other University

(Ph D Fellow)

INSTITUTE FOR SOCIAL A N D ECONOMIC CHANGE

Nagarbhavi PO: BANGALORE-560 072

CERTIFICATE

This is to certify that thesis entitled ‘Health Insurance Schemes

in India: An Economic Analysis of Dem and Management under Risk Pooling and Adverse Selection’ submitted by Mr Sukumar Vellakkal for the award o f the degree o f Doctor o f Philosophy in Economics is based on the candidate’s own research work under my guidance and superv ision during the period of the study

It has not been previously formed the basis for the award o f any Degree/Diploma/Associateship/Fellowship or other similar titles to any candidate

I sincerely express my heartfelt deep sense of gratitude to Professor Gopal K.Kadekodi, my mentor and supervisor for the thesis It is a great privilege to complete this thesis under his guidance and supervision He was kind enough to find sufficient time to guide me although his days were busiest as the Director of ISEC His way of guiding me in this thesis work was unique; it gave me enough confidence

to think in depth on my research topic His moral support, constant encouragement, and above all, his love and affection have been an instant tonic for me to carry out this research work I also express heartfelt gratitude to Mrs Savitha Kadekodi for her love and affection, and moral support I am grateful to Ms Kamala Aunty for all her moral support throughout.

I would like to take this opportunity to express my deep sense of gratitude to Dr K K Hari Kurup, Lecturer, Govt College, Kasargod It was he who introduced me to the research world and guided me to get admission to ISEC His moral support, guidance and constant encouragement are invaluable to me, I am short of words I express deep sense of gratitude to Mrs Deepa Kurup And also, respecful thanks and gratitude to Narayanettan.

I cherish the memory of late Mr.Chandrasekharan, Lecturer, Govt College, Kasargod His immature death was a big shock and loss to me I greatly acknowledge his support and concern towards me.

I have greatly benefited from my academic association with Prof David M Dror, Erasmus University, Netherlands I use this opportunity to express my deep sense of gratitude to him His methods and approaches to research have influenced

I am fortunate enough to meet an eminent personality, a good academician with a great heart: Prof, J F Wen, University of Calgary, Canada I have benefited a lot from the discussion with him I am fond of Prof J F Wen and his wife Gabrille who made my stay at Canada during my PhD works a wonderful one.

I thank Prof Anil Gumber, senior faculty, Warwick University, UK for his guidance through out my PhD research He was kind enough to timely respond to my queries and also showing much interest on my research work I use this opportunity

to express my heartfelt gratitude to him.

It was great to learn from Prof Shashanka Bhide, Professor, NCAER and former RBI Chair Professor, ISEC I greatly recall his advice, suggestions and comments as a Doctoral Committee member of my PhD research.

Back to ISEC, the comments and suggestions of the doctoral committee members of my PhD research were very constructive and useful for me I owe to Prof Madheswaran for his academic and personal support Special thanks to Prof KNM Raju, former professor of PRC unit, ISEC.

The critical and constructive comments and suggestions of the panel members at various bi-annual seminars in the institute were very helpful in bringing the thesis to the present shape Here, I specially thank Prof James, Head, PRC unit

at ISEC, Prof.Indrani Gupta, Institute of Economic Growth, New Delhi, Prof Rajashekhar, Head, Center of Decentralization at ISEC, Dr Mathiyazhakan and Dr Gayathri.

I am grateful to ISEC for selecting me for the PhD programme I thank the ISEC fraternity for the support throughout the period.

I am very much fond of Prof Govinda Rao, the then Director of ISEC His ideology has influenced me a lot I greatly acknowledge his advice and personal support rendered towards me, it really helped in my PhD research.

The faculty members of the institute were high co-operative and supportive

My Whole hearted thanks to Prof K N Ninan, Prof M R Narayana, Prof Sangeetha,

Dr Venkatachalam, Prof.Meenakshi Rajeev, Prof Usha Devi, Dr Gaythri Devi, Dr V

P Vani, Dr G S Shastri, Dr T V Sekhar, Dr Madhusree Sekhar, Dr Sivakami, Prof R

I enjoyed the friendship of Subodh, who made my stay at ISEC very interesting and lively.

I heartfelt respect and thanks to Dr Jyothis and Dr Jeena Jyothis for their inspirational academic and personal support throughout the period.

I greatly acknowledge the friendship and academic association of Ms Erikka, Erasmus University, Netherlands and Alex, University of Cologne, Germany It was wonderful to work with them, their collaboration made the CHAT exercise conducted

in various Indian villages and slums very interesting I also thank Mr Ralf Rademacher for his constructive suggestions and comments on CHAT tool.

My special thanks are due to Mrs Olga and Mr Hugo for their personal and moral support through out The support they extended towards me made my stay in the Netherlands very much comfortable.

Thanks are due to Mr K S Narayana, AR (Academic) for his careful and efficient administrative help, and also for language editing of this thesis I also thank Mrs Margaratte, Accounts section, Mrs Santha, Reception and Mr Srinavasamurthy, Director Office, ISEC.

I sincerely acknowledge the help and assistance received from Mr Krishna Chandran, Mr Satish Kamath in the computer center and members of Library staff of ISEC, especially Mr.Kalyanappa.

I take this opportunity to thank my friends at ISEC: Bikas, Badri, Poulomi, Nisha, Anitha, Somasekar, Bhanumurthy, Ashish Das, Emil, santhosh, Anand Vadi, Pratheeba, Venu, Sathyasiba, Durba,Sabuj, Biplab, Manojit, Avinandan, Rajdeep, Akshay, Jaganath, Sitakantha Sethi, Rishi, Dukhabandha sahoo, Geethu, Pattu, Sarbhani, Gnadhari, Kalid Wasim, Malini, Smitha, Tunga, Subir, Sachi, Nithin, Yogeswari, Kannan.

Discussion with my friend Mahesh was very productive; I greatly acknowledge his support at various stages of my PhD research.

Thanks also to Prashobh for his personal and academic help at various stages

of my PhD work My special thanks to Naveen, Anantha and Srikant for giving a nice friendship at ISEC The friendship of Mainak Majumdar, Lija, Sunitha, Sarala and Binitha helped me to ease the pressure and difficulties at various stages of this work, special thanks to them,

I also thank my friends at CDS: Rajesh Puliyara, Shyjan, rajesh Kommath, Anil, Abdul, Achan, Hari, Syam, Subratho, Harilal My special thanks to Nirmal Roy, Krishna and kunhikrishnan for extending their help in data collection and also for the nice friendship throughout.

I greatly acknowledge the support extended to me by Mr Sanjeev, PhD

fellow, CMDR Dharward.

I greatly acknowledge the fellowship given by ICSSR for my PhD research I also acknowledge SICI, New Delhi for awarding me the fellowship and giving me an opportunity to do research in Canada I thank the staff of SICI Further, I thank the staff of University of Calgary for their support during my stay at Canada The friendship of Abdu, Blake, Omar and Julia and John made my life more comfortable there.

I express my deep sense of gratitude to faculty members of Institute of Health policy and Management, University of Erasmus, Netherlands, for formally teaching me the essence of Health economics.

The support received from University of Mangalore is great; I wish to thank Prof Joshi and Dr Jayasheela for their kind help constant encouragement I also use this opportunity to express my sincere thanks to Ms Soni, Ph.D section, for her help and kind co-operation.

Back to home, I cherish the memory of my father (late) who left this world during the initial stage of my PhD research I recall the moral support extended by

my family towards me, my deep sense of gratitude to them: Mohan, Vijayan, Sureshan, Rameshan, Saro, Sumathi, Divya, Vineetha, Sreeja, Kunhi krishnan, Nisha, Babu I also express my gratitude to my Father-in-law and mother-in-law And also, special thanks to Renjith and Reshmi.

Last but not least, Remya, my beloved, for ail she is to me, I am short of words.

Page No,

Relevance o f Health insurance S chem es for India 3

T a x o n o m y o f Health Insurance in India 7 Public (social) Health Insurance S chem es 7 Micro Health Insurance (M H I) S chem es 7 The Private Health Insurance (PH I) schem es 8 Research Problem s and Q uestions 10

M ain Research H y potheses 12

Concepts, Review of Literature and Methodology 15-48

Health Insurance; Basic concepts and principles 15

M arket Failures in Health Insurance Mai’ket 21

D em and for Health Insurance 29

S om e selected study on H ealth insurance schem es in India 34

D ata sources and M ethodology o f the Study 36

E C C P H ousehold data on M H IU s 40 Primary data on Clients Preferences on Health Insurance 41 Benefits (C hoosing H ealthplans All T o g e th e r ( C H A T -1 ))

M ethodology o f present research 42

Equity Aspects of the Health Insurance Coverage in 49- India

Equity in Health Care and Equity in H ealth Insurance 49

C overage Health Insurance S chem es and their target population 52 Inter-income class distribution o f health insurance coverage 54

3.5 Intra-incom e class analysis o f health insurance coverage 57

3.6 E conom etric Estim ation on the probability to hav e M H I 60

coverage for various incom e class households 3.7 Prem ium Burden on H o useholds 66

Chapter 5 Information Asymmetry, Market Failure and the Health 93-119

Insurance Coverage

5.2 Conceptual and theoretical frame 94

5.3 Familiarity o f different aspects o f Insurance 98

5.3.1 A w areness about the Insurance System 98

5.3.2 Role o f ‘Insurance H abiP 102 5.4 A sym m etric inform ation and Inform ation D issem ination 104

Channel on Health Insurance C overage 5.5 A model o f insurance a g e n t’s rational choice 106 5.5.1 Insurance A gent and Selection Bias 109 5.6 Empirical estim ation on the presence o f adverse selection: 113

Significance o f Health Risk

130 131

Preferences for Health Insurance Benefits and Health 133-153 Insurance Schemes

Preferences o f the people for different health care benefits 135

w ithout budget constraint Preferences o f the people for different health care benefits 138 with budget constraint

Design o f the decision exercise

D efinitions o f the various benefit types

D eterm ination o f Actuarial Costs Selection o f the Insurance P rem ium Survey Population

Preferences for various health insurance benefits at Individual level

Choice o f Benefits: Som e Q ualitative Insights du rin g the

C H A T E xperim ent Preferred HI Package and the prevailing HI schem es

D iscussion Benefits o f prim ary im portance Health Insurance Package I: Benefit package 1:

O P (b )+ IP (b )+ T (b )+ D (b ) Health Insurance Package 2: lP(b)-i-T(b)+D(b) Health Insurance Package 3: OP(b)-i-T(b)+D(b) Health Insurance P ackage 4: OP(b)-i-IP(b)-i-D(b) Benefits o f secondary im portance

Health Insurance Package 1; Preventives care (P) + Indirect

C ost (IC) + M edical Equipm ent (M E) -i- Dental care (DC) -i-

M ental care (M) Chapter S um m ary

C H A T Materials

138

132 140

141 136 142 142

143

146 148 148 148

150 150

151

151 151

Main Research H y potheses 162

D ata Sources and M ethodology 162

S um m ary o f the Main Chapters 166

Scope and limitations o f the present study and suggestions 177

for future research

1 - Q uestionnaire for H ousehold Survey, E C C P Project 179 2- Interview schedule for the voluntarily insured people 186 3- Interview schedule for the uninsured people in the locations 195

of PHI insured

ADB Asian Development Bank

CGHS Central Government Health Scheme

CHAT Choosing Healthplans All Together

ESIS Employees State Insurance Scheme

ECCP European Union Cross Cultural Program

GDP Gross Domestic Product

GIC General Insurance Corporation

IRDA Insurance Regulatory and Development AuthorityMHIUs Micro Health Insurance Units

Lie Life Insurance Corporation

MHIs Micro Health Insurance schemes

NIC National Insurance Corporation

NCAER National Council for Applied Economic ResearchNSSO National Sample Survey Organisation

OOPS Out Of Pocket Spending

NIAC New India Assurance Company Ltd

PRIs Panchayat Raj Institutions

PHI Private Health Insurance

Rural MHIs Rural Micro Health Insurance schemes

Urban MHIs Urban Micro Health Insurance schemes

5EWA Self Employed Women’s Association

SHGs Self Help Groups

QIC Oriental Insurance Company Ltd

UIIC United India Insurance Company Ltd

UHI Universal lleeilth insurance

WHO World HealOi Organisation

WHR World Health Report

WDR World Development Report

2.3 Number of Households from the locations of Micro Health 41

Insurance Units

2.5 Classification of households in to various income classes and 45

cut-off points

3.1 Proportion of the households across different income classes 543.2 Proportion of the households across various income classes 56

in each ‘Rural MHI’ schemes

3.3 Proportion of the households across various income classes 56

in each 'Urban MHf scheme

3.4 Proportion of the Insured and Non Insured households 58

across different income classes in Rural MHI, Urban MHI

and PHI schemes

3.5 Proportion of the Insured and Non Insured households in 58

various MHI schemes across different income classes

3.6 The mean value of the ‘HI ratio‘ across different income 59

classes

3.8 Probability to have health insurance coverage- Probit model 63

results of Rural MHI schemes

3.9 Probability to have health insurance coverage- Probit model 64

results of the Urban MHI schemes

3.10 Percapita health insurance premium (in Rs.) paid by different 67

income classes

4.1 Highest educational qualification among the Insured and 75

Non Insured households (%)

4.3 Definition and m easurem ent of variables 854.4 Probability to have health insurance coverage- Probit model 86

results of Rural MHI schemes

4.5 Probability to have health insurance coverage- Probit model 89

results of Urban MHI schemes

4.6 Probability to have health insurance coverage: Marginal 90

effects of the probit model of the selected variables

5.1 Knowledge about Insurance providers by the Insured and Non 99

Insured (%)

5.2 Knowledge about some selected insurance products other 100

than health insurance schemes (%)

Knowledge about different types of health insurance products

(%)

5.4 Knowledge about health insurance policies other than 102

Mediclaim Policy at the time of joining- insured people (%)

5.5 'Other Insurance Enrolment Status' of tlie Insured and Non 104

Insured (%)

5.6 Main source of information on health insurance (Mediclaim 104

Policy) scheme for both Insured and Non Insured (%)

5.8 Probability to have health insurance coverage- Probit model 117

results of PHI schemes

6.1 Households reporting bad health or bad medical situation 121

(high risk) at least one among tlie members in the household

in MHI s c h e m e s (%)

6.2 Probit model results specific to the probability of the high risk 121

to have health insurance

6.3 Definition and m easurem ent of variables 1236.4 Probability to have health insurance coverage- Marginal effect 124

of Probit model estimate of Rural MHI schemes

6.5 Probability to have health insurance coverage- Marginal effect 125

of Probit model estimate of Urban MHI schemes

6.6 Probability to have health insurance coverage in MHI 129

scheme- Marginal effect of Probit model estimate of some

selected param eters

7.1 Preferences of the Participants at the individual level (%) 1437.2 Ranking of preferences and cost of insurance benefits 145

7.4 Existing Health Insurance Schemes and Insurers in India, as 147

Sticker cost* of benefits in CHAT exercise

7.8 Characteristics of Study Participants in the CHAT exercise 154

7.10 Status of different health insurance benefits of both MHI 159

Units and PHI providers