HEALTH INSURANCE

Prof.Manimegalai Rajamohan,
Principal,
SCPM College of Nursing,
Gonda

Health Insurance is a system in which prospective consumers of healthcare

make payment to a third party in the form of insurance scheme which in the
event of future illness will pay the providers of care for some or all of the
expenses incurred.

Health insurance is a mixed source of finance, as it often shows contribution,

from both employers and employees and sometimes from government.
Contributions to such schemes are often mandatory.

Three principal types of insurance are:-

(i) Government or social insurance: These systems provide

compulsory or, to some extent, voluntary coverage for people
employed in the formal sector. Premiums or contributions are
generally based on the individual’s income regardless of actuarial
risk.

(ii) Private insurance: It provides coverage for groups or individuals

through third-party payer institutions operating in the private sector.
Premiums tend to be based on an actuarial calculation of the
incidence of diseases and the use of services i.e. they are generally
not income related and vary with age and sex.

(iii) Employer based insurance: It refers to coverage falling between

the other two categories, in which employers or parastatal or private
bodies serve as the third party payer or collection agent, with
eligibility based on employment status. Such schemes are often
required by national labour codes.
Advantages of Insurance

• Health insurance has been seen as a way of allowing government to

diversify the sources of revenue of the health sector, to improve efficiency
by giving individuals some role in paying for their own healthcare,

• To spread the burden of health costs over time and across a wider
population, which will reduce risk.

• The existence of risk is the fundamental rationale for insurance.

• Healthcare costs may be infrequent, but they are potentially very high.
This means that without insurance, individuals may be unable to pay for
care even if they are willing to do so.

• It converts unpredictable future expenses into payments that can be

budgeted for in advance.

• The agreement converts large, infrequent and unpredictable expenditures

into smaller, periodic payments. These payments are collected to form a
pool of resources that can be drawn upon to meet the needs of a
participant who encounters misfortune.

• Nearly all the developed countries that now provide the same rights to
healthcare to the whole population went through an evolutionary stage of
voluntary followed by compulsory health insurance.

• The compulsory health insurance of employees is administratively easier

to collect than an income tax.

• It is also preferable in terms of equity to many of the indirect taxes used

in developing countries for high proportion of revenue and more readily
paid as the benefits are visible.

• If the insurance pays the full costs of the services, then tax revenue can be
utilized to develop and improve services for the uninsured.
Issues in Insurance

➢ Insurance market suffers from market failures, particularly those

associated with imperfect information. These problems are often
described as those of moral hazard (those who are insured will tend to
overuse insured services)

➢ ‘adverse selection’ (those who anticipate needing healthcare will

choose to buy insurance more often than others, which leads to higher
costs, lower profits, higher premiums and ever fewer users in
consequence).

➢ Frequently, these problems mean that there are no private insurance

markets at all. When they do exist, they may be guilty of ‘cream
skimming’, when the insurer excludes the riskier customers (on the
basis of their income or prior health status) which undermine the value
of the insurance altogether.

➢ Such market failures explain why governments tend to play a regulatory

role in health insurance markets.

Managing the issues

✓ There are well developed methods used by the insurance industry to

combat moral hazard.

✓ These include "co-insurance" making the insured pay a proportion of his

medical cost;

✓ ‘deductibles’, making the insured liable for the initial expenses up to a

stated sum;

✓ ‘fixed indemnity’ where an individual is insured for a given expenditure,

usually, for an illness or a year. Occasionally over his lifetime (Brandt,
Horisberger and Von Wartburg 1980).
 ✓ Co-insurance is most widely used in both developed and developing
countries.

Compulsory social health Insurance

❖ Compulsory social health insurance is a long-standing tradition in

many countries of North America and Europe (WHO, 1993). Coverage
of the population within these countries varies.

❖ During the last decade, some countries (e.g. Germany, Netherlands)

enacted legislation that slightly reduced the proportion of people
compulsorily covered by social health insurance.

❖ Coverage by non-compulsary, private for-profit insurance schemes

increased as the wealthy in certain countries were allowed to opt out of
social health insurance schemes. Elsewhere, people already covered by
social health insurance bought additional private protection, partly
because legislation in some cases reduced the level of benefits provided
by the compulsory schemes.

❖ In other parts of the world, the number of compulsory insurance

schemes has grown continuously during the last decade. Many Latin
American countries (Ron, Abel Smith, Tamburi, 1990) established
compulsory health insurance schemes many years ago.

❖ Many governments including those of Ghana, Nigeria and Zimbabwe,

are also promoting compulsory health insurance schemes.

❖ In South-East Asia, some nations such as China, the Philippines and

the Republic of Korea, introduced health insurance during the 1960s
and have now achieved a high coverage of the population.

❖ One reason why a number of countries introduced social health

insurance was its potential to attract additional resources to the health
sector.
 ❖ Contrary to most tax-financed systems, health insurance premiums are
earmarked as health resources and are not likely to be diverted to other
purposes.

❖ However, the larger the proportion of the population in the informal

economy, the more difficult it is to raise contributions.

Administrative Cost of social Insurance

❖ As far as administrative efficiency is concerned, administration costs

are one of the main factors to be considered in developing new
arrangements for social health insurance.

❖ Administrative costs in western European insurance funds tend to

amount to about 5%, but those found by Mesa-Lago (1986) in Latin
America indicate an upper limit of about 28% of total revenue In
Africa costs (Nikanger, 1985) may be even higher: in Mali, for
example, it was estimated that 50% of insurance funds were absorbed
in administration.
Advantages of Compulsory social Insurance
▪ Social health insurance schemes may transfer wealth not only from the
healthy to the sick, but also from the rich to the poor.
▪ One of the principles behind compulsory health insurance is that it should
promote social solidarity.

▪ This is especially true if contribution rates are income-related but

benefits are provided according to need, regardless of the amount an
individual has contributed.
Disadvantages of compulsory social Insurance
o Criticism of the equity effects of social insurance schemes has been
expressed in other parts of the World. Mesa-Lago (1986) historical
analysis of social security schemes in Latin America argues that in most
countries the insured are urban wage-earners and their closest
dependents.

o This relatively wealthy group is generally covered by an extremely

expensive social security net, of which recipients sometimes fund less
than one-third.
 o Thus in effect the State, or the employer, supports healthcare for the
middle classes.

Conclusion

Health insurance systems (private and social) are generally well

accepted by insured persons, employers and providers. The main reason for this
is that insurance systems are generally defined-benefit schemes which
guarantee a benefit package in exchange for premium payments. Tax-financed
systems do not produce the same reliability.