Health Economics & Financing
Community Medicine · National Health Programmes · lean revision notes
Health Economics & Financing
Health economics studies how scarce resources are allocated to maximise health gains, while health financing answers three questions: how money is raised, pooled, and spent to buy services. For NEET PG, this topic is examined through India's expenditure ratios, out-of-pocket (OOP) burden, catastrophic and impoverishing expenditure, the Bismarck vs Beveridge dichotomy, and the evolution of public insurance schemes (RSBY → PMJAY).
Core definitions & terminology
Health economics is the application of economic principles (scarcity, opportunity cost, supply–demand, efficiency, equity) to the health sector. The defining feature of the health "market" is market failure — imperfect information (the patient cannot judge what care is needed), supplier-induced demand (the doctor decides demand), externalities (vaccination protects others), and uncertainty of illness — which is precisely why pure free markets fail and governments intervene.
High-yield: Health is not a normal market commodity because of information asymmetry, supplier-induced demand, externalities, and the uncertain/unpredictable nature of illness. These four are the classic reasons cited for government intervention and insurance.
Key cost terms tested:
| Term | Meaning | Example |
|---|---|---|
| Direct cost | Resources directly consumed in care | Drugs, surgeon's fee, hospital stay |
| Indirect cost | Productivity lost due to illness/death | Wages lost, premature death |
| Intangible cost | Pain, suffering, anxiety (hard to value) | Grief, disability distress |
| Opportunity cost | Value of next-best forgone alternative | Money spent on a CT scanner not spent on ANMs |
| Marginal cost | Cost of producing one additional unit | Cost of vaccinating one more child |
High-yield: Opportunity cost = benefit of the next best alternative forgone. It is the single most frequently tested economics concept across all health-economics MCQs.
Economic evaluation methods
| Method | Costs measured in | Outcomes measured in | Use |
|---|---|---|---|
| Cost-minimisation analysis (CMA) | Money | Assumed identical | Compare two equally effective options |
| Cost-effectiveness analysis (CEA) | Money | Natural units (life-years, cases prevented) | Compare interventions with one common outcome |
| Cost-utility analysis (CUA) | Money | QALY / DALY | Compare across different diseases |
| Cost-benefit analysis (CBA) | Money | Money (₹) | Compare health vs non-health programmes |
High-yield: Cost-benefit analysis expresses BOTH cost and outcome in monetary terms (allows comparing a health programme with, say, building a road). Cost-utility analysis uses QALYs/DALYs. A QALY = 1 year of life in perfect health; a DALY = 1 lost year of healthy life (DALY = YLL + YLD).
India's health expenditure — the numbers that get asked
This is the highest-yield numeric block. Figures are from the National Health Accounts (NHA) estimates, the official source for India's health spending.
| Indicator | Approximate value (recent NHA) | Target/benchmark |
|---|---|---|
| Total Health Expenditure (THE) as % of GDP | ~3.2% | — |
| Government / public health expenditure as % of GDP | ~1.3–1.8% | National Health Policy 2017 target: 2.5% of GDP by 2025 |
| Government health expenditure as % of total govt expenditure | ~5–6% | — |
| Out-of-pocket expenditure (OOPE) as % of THE | ~40–48% (falling trend) | Lower is better |
| Government health expenditure as % of THE | ~40% (rising) | Higher is better |
| Per capita govt health expenditure | rising year-on-year | — |
High-yield: The National Health Policy (NHP) 2017 target is to raise public health expenditure to 2.5% of GDP by 2025. This single figure is asked repeatedly — memorise "2.5% of GDP".
High-yield: India's out-of-pocket expenditure has historically been very high (~62–70% a decade ago) and is declining (now roughly 40–48% of THE) as government spending rises. The direction of change (OOP falling, public share rising) is itself an exam point.
Why high OOP is bad → it is the most regressive and inefficient way to finance health → no risk pooling → the sick poor pay the most → leads to catastrophic spending and impoverishment.
Catastrophic & impoverishing health expenditure
These two WHO-defined concepts are frequently tested together.
Catastrophic Health Expenditure (CHE):
- WHO definition: OOP health spending that exceeds 40% of a household's capacity to pay (i.e., non-subsistence/non-food income).
- Alternative threshold often quoted: OOP > 10% of total household consumption/income (used in SDG indicator 3.8.2).
High-yield: Catastrophic health expenditure (WHO) = OOP spending > 40% of capacity to pay (income remaining after subsistence/food needs). The SDG 3.8.2 indicator uses thresholds of >10% and >25% of total household expenditure.
Impoverishing health expenditure: OOP payments that push a household below the poverty line (or deeper into poverty). In India, an estimated 5–6 crore people (≈55 million) are pushed into poverty every year due to health spending — a classic stat.
High-yield: Each year roughly 55 million Indians are pushed into poverty by out-of-pocket health spending; a large share of this is due to medicines/drugs (the single biggest component of OOP), followed by diagnostics and private outpatient care.
Stepwise causal chain (memorise the flow):
Illness → no insurance/risk pooling → out-of-pocket payment → spending exceeds 40% of capacity to pay (catastrophic) → assets sold / loans taken → household falls below poverty line (impoverishment).
High-yield: Outpatient care and medicines cause more catastrophic/impoverishing expenditure cumulatively than inpatient hospitalisation in India, because outpatient costs are recurrent and usually not covered by hospital-only insurance like PMJAY.
Functions of a health financing system
WHO describes three core functions — a favourite "match the function" question.
- Revenue collection / raising → from taxes, premiums, OOP, external aid.
- Pooling of funds → spreading financial risk across the population so the healthy subsidise the sick (the heart of insurance).
- Purchasing / provision → strategic buying of services (passive vs strategic purchasing).
The ultimate goal is Universal Health Coverage (UHC) — all people obtain needed quality services without financial hardship. UHC has three dimensions visualised as the "UHC cube": breadth (who is covered) × depth (which services) × height (proportion of cost covered).
High-yield: Pooling is the function that provides financial risk protection; the larger and more diverse the pool, the better the protection. Strategic purchasing (deciding what to buy, from whom, and how to pay) improves efficiency over passive purchasing.
Models of health financing — Bismarck vs Beveridge (and others)
This comparison is the single most exam-relevant "model" topic.
| Feature | Bismarck model | Beveridge model |
|---|---|---|
| Origin | Germany (Otto von Bismarck, 1883) | UK (William Beveridge report, 1942 → NHS 1948) |
| Funding source | Social Health Insurance — payroll contributions from employer + employee (premiums) | General taxation |
| Providers | Mostly private providers, non-profit "sickness funds" (insurers) | Mostly government-owned (state-run hospitals) |
| Coverage basis | Employment-linked (then extended) | Citizenship/residence — universal |
| Examples | Germany, France, Japan, Belgium, Netherlands | UK (NHS), Spain, Sweden, Cuba, India's public sector |
| Mnemonic anchor | Bismarck = Buy insurance (premiums) | Beveridge = Budget/tax-funded govt service |
Two more models examiners add:
| Model | Description | Example |
|---|---|---|
| National Health Insurance | Single govt insurer funded by premiums/tax, private providers | Canada, Taiwan, South Korea |
| Out-of-pocket model | No system; people pay directly at point of care | Rural/uninsured low-income regions; large part of India historically |
High-yield: Bismarck = social insurance via employer/employee premiums (Germany). Beveridge = tax-funded, government-provided, universal (UK NHS). Canada = National Health Insurance (single-payer, tax-funded, private delivery). These three pairings are the classic MCQ.
Social Health Insurance (SHI) vs Private/Commercial Insurance:
| Feature | Social health insurance | Private (commercial) insurance |
|---|---|---|
| Participation | Compulsory | Voluntary |
| Premium basis | Income/ability to pay | Risk/health status (older, sicker pay more) |
| Profit motive | Non-profit / social | For-profit |
| Risk pooling | Wide, cross-subsidising | Narrow; cherry-picking of low-risk |
| Equity | High (solidarity principle) | Low |
| Indian example | ESIS, CGHS | Mediclaim, private health insurers |
High-yield: In social insurance premium depends on income (ability to pay), whereas in private/commercial insurance premium depends on individual risk. Social insurance follows the principle of solidarity; private insurance tends to adverse selection and cream-skimming of healthy clients.
India's health insurance & financing schemes
A timeline question is common — know the year and funding of each.
| Scheme | Year | For whom | Funding/model |
|---|---|---|---|
| ESIS (Employees' State Insurance) | 1948 (Act 1948) | Organised-sector workers below wage ceiling | Employer + employee contribution (social insurance) |
| CGHS (Central Govt Health Scheme) | 1954 | Central govt employees/pensioners | Tax + small contribution |
| RSBY (Rashtriya Swasthya Bima Yojana) | 2008 | BPL families (below poverty line) | Govt-funded (Centre 75% : State 25%) |
| RSBY later moved to | 2015 | — | Ministry of Labour → Ministry of Health & Family Welfare |
| PMJAY / Ayushman Bharat (PM-JAY) | 2018 | Bottom ~40% (poor & vulnerable, SECC-based) | Tax-funded, govt insurance |
Rashtriya Swasthya Bima Yojana (RSBY) — exam focus:
- Launched 2008 by the Ministry of Labour & Employment for BPL families.
- Provided smart-card based cashless hospitalisation cover of ₹30,000 per family per year (floater, up to 5 members).
- Cost shared Centre : State = 75 : 25.
- Transferred to MoHFW in 2015; subsumed/replaced by PMJAY (2018).
High-yield: RSBY (2008) = ₹30,000/family/year cashless cover for BPL families, smart-card based, originally under Ministry of Labour. It was the precursor that was scaled up into PMJAY (Ayushman Bharat, 2018), which gives ₹5 lakh per family per year secondary/tertiary hospitalisation cover to ~10.7 crore poor/vulnerable families (SECC 2011 criteria) — the world's largest government-funded health assurance scheme.
High-yield: PMJAY covers only secondary and tertiary inpatient (hospitalisation) care — it does NOT cover routine outpatient (OPD) care or most medicines, which is why OOP from outpatient/drugs remains a problem.
Ayushman Bharat has two pillars: (1) Health & Wellness Centres (HWCs) delivering comprehensive primary care; (2) PMJAY for hospitalisation insurance.
Provider payment mechanisms
How providers are paid drives behaviour — a frequent "what is the effect" question.
| Method | Description | Incentive/risk |
|---|---|---|
| Fee-for-service | Paid per service/item | Over-provision (most inflationary) |
| Capitation | Fixed amount per enrolled person | Under-provision; cost control |
| Salary | Fixed pay | Neutral; may reduce productivity |
| Case/DRG payment | Fixed amount per case/diagnosis (package rate) | Efficiency; risk of early discharge |
| Global budget | Fixed total budget for period | Strong cost control |
High-yield: Fee-for-service encourages over-treatment/supplier-induced demand and is the most cost-inflationary; capitation and global budgets contain costs but risk under-provision. PMJAY pays hospitals through package/case rates.
Insurance concepts that get tested
- Moral hazard: insured people over-use services because they don't pay at point of care (controlled by co-payment, deductibles).
- Adverse selection: sicker/high-risk people are more likely to buy insurance, raising costs (controlled by compulsory/universal enrolment).
- Cream-skimming / risk selection: insurers preferentially enrol healthy clients.
- Co-payment / deductible / ceiling (sum insured): cost-sharing tools.
High-yield: Moral hazard (over-use after insuring) is countered by co-payments; adverse selection (only the sick enrol) is countered by mandatory universal coverage. Don't confuse the two — this swap is a common distractor.
Equity & efficiency concepts
- Horizontal equity: equal treatment of those with equal need.
- Vertical equity: appropriately unequal treatment of those with unequal need (more for the sicker/poorer).
- Allocative efficiency: producing the right mix of services that society values.
- Technical efficiency: producing a given output at least cost.
High-yield: Vertical equity = treating unequals unequally (e.g., free care for the poor). Horizontal equity = treating equals equally. Progressive (tax/SHI) financing is equitable; OOP is regressive (poor pay a larger share of income).
Complications / consequences of poor financing
- Catastrophic expenditure and impoverishment (≈55 million/year in India).
- Forgone care — the poor delay or skip treatment.
- Distress financing — selling land/jewellery, borrowing at high interest.
- Inequity — wide rich–poor and rural–urban gaps in access.
- Inefficiency — fragmented small pools, dominance of fee-for-service private OPD.
Recently asked / exam angle
- "NHP 2017 target for public health expenditure" → 2.5% of GDP by 2025.
- "Catastrophic health expenditure cut-off (WHO)" → >40% of capacity to pay (and SDG 3.8.2 uses >10%).
- "Bismarck model is based on" → Social health insurance (employer–employee premiums); Beveridge → general taxation (UK NHS).
- "RSBY launched in / cover amount" → 2008 / ₹30,000 per BPL family per year, smart-card cashless.
- "PMJAY cover amount" → ₹5 lakh per family per year, hospitalisation only.
- "Which is the next-best forgone alternative" → Opportunity cost.
- "Cost & outcome both in money" → Cost-benefit analysis; "outcome in QALY/DALY" → Cost-utility analysis.
- "Over-use of services by insured" → Moral hazard; "only sick people buy insurance" → Adverse selection.
- "Most regressive method of health financing" → Out-of-pocket payment.
- "Biggest component of OOP in India" → Medicines/drugs.
Rapid revision
- NHP 2017 target: public health spending = 2.5% of GDP by 2025; current ~1.3–1.8%.
- India's THE ≈ 3.2% of GDP; OOP ≈ 40–48% of THE and falling.
- Catastrophic expenditure (WHO) = OOP >40% of capacity to pay; SDG indicator uses >10% of household expenditure.
- ~55 million Indians/year pushed into poverty by health spending; medicines are the top driver.
- Bismarck = social insurance, premiums (Germany); Beveridge = tax-funded, govt-provided, universal (UK NHS).
- Canada = National Health Insurance (single-payer, tax-funded, private delivery).
- Social insurance premium ∝ income; private insurance premium ∝ risk.
- RSBY (2008) = ₹30,000/BPL family/year, smart-card cashless, Ministry of Labour → MoHFW (2015) → PMJAY (2018, ₹5 lakh/family/year).
- PMJAY covers hospitalisation (secondary/tertiary) only — no OPD/medicines.
- Opportunity cost = value of next-best forgone option; CBA values outcomes in money, CUA in QALY/DALY.
- Fee-for-service → over-provision (most inflationary); capitation → under-provision; PMJAY uses package/case rates.
- Moral hazard → co-payment; adverse selection → mandatory universal coverage; OOP is the most regressive financing method.