ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Catastrophic Payments and Impoverishment due to Out-of-Pocket Health Spending

Out-of-pocket payments are the principal source of healthcare finance in most Asian countries, and India is no exception. This fact has important consequences for household living standards. In this paper the author explores significant changes in the 1990s and early 2000s that appear to have occurred as a result of out-of-pocket spending on healthcare in 16 Indian states. Using data from the National Sample Survey on consumption expenditure undertaken in 1993-94 and 2004-05, the author measures catastrophic payments and impoverishment due to out-of-pocket payments for healthcare. Considerable data on the magnitude, distribution and economic consequences of out-of-pocket payments in India are provided; when compared over the study period, these indicate that new policies have significantly increased both catastrophic expenditure and impoverishment.


Catastrophic Payments and Impoverishment due to Out-of-Pocket Health Spending

Soumitra Ghosh

Out-of-pocket payments are the principal source of healthcare finance in most Asian countries, and India is no exception. This fact has important consequences for household living standards. In this paper the author explores significant changes in the 1990s and early 2000s that appear to have occurred as a result of out-of-pocket spending on healthcare in 16 Indian states. Using data from the National Sample Survey on consumption expenditure undertaken in 1993-94 and 2004-05, the author measures catastrophic payments and impoverishment due to out-of-pocket payments for healthcare. Considerable data on the magnitude, distribution and economic consequences of out-of-pocket payments in India are provided; when compared over the study period, these indicate that new policies have significantly increased both catastrophic expenditure and impoverishment.

The author is grateful to an anonymous referee for comments on an e arlier version of this paper.

Soumitra Ghosh ( is at the Centre for Health Policy, Planning and Management, Tata Institute of Social Sciences, Mumbai.

1 Introduction

ut-of-pocket (OOP) payments are the principal source of healthcare finance in most Asian countries and India is no exception. This fact has important consequences for household living standards.

The macroeconomic adjustments of the 1990s prompted some major policy shifts in the health sector. While health sector r eforms in India can be traced to as early as the 1980s, as the State began to reduce its role in the provision of healthcare services, it was only in the 1990s that reforms began in earnest. In India, health sector reforms have been piecemeal and incremental but have led to extensive changes in the organisation, structure and delivery of healthcare services and financing (Sen, Iyer and George 2002).

One of the important policy shifts in the public health sector was the introduction of user fees during the Eighth Five-Year Plan (1992-97). Because health policy is administered at the state level in India, user fees were implemented at different times in different states. The majority of states introduced these fees in the midto late 1990s. Also, during the late 1990s to early 2000s, many states initiated World Bank-sponsored health system reforms that further increased user fees in government hospitals. Although user fees were waived for people living below the poverty line, the definition of poor was arbitrary, leading to limited relief for most poor people (Thakur and Ghosh 2009).

The second policy change was mainly related to the decline of government spending on health. The Structural Adjustment Programme led to central and state governments reducing funding for the social sector. Public expenditure in the health sector was further squeezed at the state level in the 1990s (Mooij and Dev 2002), leading to a government failure to meet the public’s healthcare needs. As public health investment decreased and user fees in the public sector increased, the private sector moved in to exploit the market opportunity (Peters et al 2002; Bhat 1996).

Another major development in the health sector occurred with the introduction of the new Drug Price Control Order (DPCO) in 1994. According to the DPCO (1995), only 74 out of 500 commonly used bulk drugs were to be kept under statutory price control. Pricing pharmaceutical sector was further liberalised in 2002. The impact of these drug policy changes could be seen in the s piralling increase in drug prices during the period 1994-2004 (National Commission on Macroeconomics and Health 2005).

All these developments in the health sector are expected to push OOP health payments upward in both public and

Economic & Political Weekly

NOVEMBER 19, 2011 vol xlvi no 47

p rivate facilities, and these increases, in turn, are likely to a ffect healthcare utilisation and overall health. In the absence of adequate insurance coverage – and more than 90% of India’s population has no health insurance – expenditures to treat i llness can lead to financial catastrophe, pushing individuals or households into poverty or deepening their existing poverty (van Doorslaer et al 2006; Wagstaff and van Doorslaer 2003; Xu et al 2003).

It is therefore important to assess how the increase in OOP health payments might affect household living standards in I ndia, especially in the context of the ongoing health sector r eforms. Empirical studies conducted in many countries on the effects of these policies point to severe negative consequences (Wagstaff and van Doorslaer 2003; O’Donnell et al 2007; Chaudhuri and Roy 2008; Garg and Karan 2009). Such findings have become a major concern for policymakers working on the financing of healthcare throughout the world (Commission on Macroeconomics and Health 2001; OECD and WHO 2003; World Bank 2004; WHO 2005, 2008).

This paper, explores significant changes that appear to have occurred in the 1990s and early 2000s as a result of an increase in OOP spending on healthcare in India and its 16 major states. The data are from the National Sample Survey (NSS) on consumption expenditure of 1993-94 and 2004-05. The paper seeks to analyse (i) the changes in OOP spending during this period,

(ii) health- financing contributions and composition in both p eriods, (iii) the magnitude and distribution of OOP payments relative to total household consumption expenditure across economic classes, (iv) the extent of catastrophic healthcare e xpenditure due to OOP payments, and (v) the changes in the magnitude and depth of impoverishment because of OOP payments for healthcare.

This paper is organised as follows: Section 2 describes the data and the methods used. Section 3 presents background information on the financing contribution and composition of OOP payments. Section 4 deals with the changes in the magnitude and distribution of OOP payments relative to total household consumption expenditure across economic classes. Section 5 shows the changes in the incidence and intensity of catastrophic e xpenditure. Section 6 presents the changes in the level and depth of impoverishment due to OOP payments across states. And, finally, Section 7 presents a discussion of the data.

2 Methods

Catastrophic Payments for Healthcare: The methodology a pplied by this study to measure catastrophic payments for healthcare has been discussed by Wagstaff and van Doorslaer (2003). An OOP payment for healthcare is considered catastrophic when the payment exceeds some threshold (Z),


d efined as a fraction of total household consumption or non-food consumption. If T represents OOP payments for healthcare, x r epresents total household expenditure and f(x) stands for food expenditure, then a household is said to have incurred catastrophic payments when T/x or T/[x-f(x)] exceeds a specified threshold, Z


One of the approaches used to measure catastrophic payments for healthcare involves analysing the incidence of catastrophic payments – that is, the percentage of households that spend more on healthcare than the threshold, which can be measured by the headcount (H). H is the fraction of the sample whose expen


ditures as a proportion of total income exceed the threshold Zcat. Meanwhile, Oi is the “catastrophic overshoot”, which equals /xi – Z if Ti /xi > Z and zero otherwise. The catastrophic

Ti catcat

overshoot captures the average degree by which payments (as a proportion of total expenditure) exceed the threshold Zcat. If we let Ei = 1 if Oi > 0 and Ei = 0 otherwise, then the headcount is given by expression (1):


Hcat (1/N)¦Ei, PE , ...(1)


where N is the sample size and μE is the mean of Ei , while H


captures only the incidence of any catastrophes occurring and O captures the intensity of the occurrence as well.

In order to determine whether poor households incur more catastrophic payments than rich households, the concentration index (CI) of Ei can be calculated. Positive values of the CI for Ei indicate a greater tendency for rich households to exceed the threshold, while negative values indicate a greater tendency for poor households to exceed the threshold.

Measuring Impoverishment due to Healthcare Expenditure:

In measuring impoverishment – that is, the extent to which households are made poor or poorer by making OOP payments for healthcare – two measures of poverty can be used: the poverty headcount and the poverty gap. While the poverty headcount measures the number of households living below the poverty line as a percentage of total households, the poverty gap captures the depth of poverty or the amount by which poor households fall short of reaching the poverty line.

If we let xi be household i’s consumption per capita (which also refers to prepayment), Zpre xi the individual

pov pre pre

i’s prepayment income, then we can define P 1 i f x Z and

i i pov

zero otherwise. The prepayment poverty headcount is then e xpressed as

N pre pre

Hpov (1/N)¦Pi PPpre, ...(2)


where N is the sample size. The average prepayment poverty gap is defined as

N pre pre

Gpov (1/N)¦gi P g , ...(3)



pre pre

where N is the sample size and gi xi zpov.

given by

pre pre pre

NGpov Gpov /Zpov, ...(4)

which allows comparative analysis as it eliminates differences in currency or the choice of the poverty line. Post-payment is d efined as xi after the subtraction of payments for healthcare.

NOVEMBER 19, 2011 vol xlvi no 47


Post-payments can be calculated following the same formula as for pre-payment. The effects of OOP payments on poverty, termed “poverty impact” (PI), are then defined as the difference between the relevant prepayment and post-payment measures, such as:

PIH post pre


Hpov Hpov

PIG post pre

G G ...(6)

pov pov

PING = NGpost pre pov pov


3 Data

Cross-sectional data are taken from the 50th (1993-94) and 61st (2004-05) rounds of national and state representative surveys on “consumption expenditure”, collected by the National Sample Survey Office (NSSO 2006) in India. The surveys include responses from 1,15,254 and 1,24,644 households, respectively, c omprising 5,64,537 and 6,09,736 individuals. By collecting d etailed information on both OOP payments for healthcare and total household consumption expenditure, these surveys offer r obust estimates of the magnitude of OOP payments relative to household budgets. The OOP payments for healthcare include e xpenditure for institutional and non-institutional care.1 All the variables related to expenditure are converted to a monthly figure. The survey periods for the 50th and 61st rounds were from July 1993 to June 1994 and from July 2004 to June 2005, respectively. The survey period of one year was divided into four sub-rounds of three months each, and an equal number of v illages and households were allotted to each round. Since data were collected over a full year, the estimates of health expenditure were expected to be largely free from seasonal fluctuations. The analysis was done at the country and state level. However, smaller states – those with a population of less than 10 million – were not included.

4 Findings
Out-of-pocket Financing Composition of Healthcare in India:

I analyse the impact of OOP payments for healthcare across c onsumption expenditure quintiles in 16 states for the periods 1993-94 and 2004-05. The mean share of household OOP healthcare expenditure in relation to monthly household consumption expenditure rose from 4.39% in 1993-94 to 5.51% (Table 2, p 66).

The percentage shares of total OOP payments on inpatient care, ambulatory care, medicines and other types of care are given in Table 1. Drugs and medicine, the most vital component of OOP expenditure, account for a substantial part of household payments. However, estimates reveal that spending on drugs declined from 81.6% of household expenditure in 1993-94 to 71.17% in 2004-05. While expenditure on ambulatory care remained s table, spending on inpatient care increased by a factor of 2.5.

The distribution of OOP expenditure varies substantially among the states: drug spending is high (79%-85%) in less-developed states such as Orissa, Bihar, Uttar Pradesh and Assam, while economically prosperous states such as Maharashtra, K erala, Gujarat, Karnataka and Punjab spend less (60%-67%) on

Economic Political Weekly

NOVEMBER 19, 2011 vol xlvi no 47

drugs. However, OOP spending on inpatient care is much higher in these richer states (15%-23% of total OOP expenditure) than in their poorer counterparts. Though average OOP payments on healthcare as a share of total consumption expenditure have r egistered a substantial increase for the majority of the states, significant differences in the mean OOP budget across states p ersist. There is a positive relationship between the share of OOP health payments and the level of economic development of states, as measured by the per capita state domestic product (SDP) (Figure 1). However, the gradient is not very steep, indicating that this relationship is rather weak.

Table 1: The Composition of Out-of-Pocket Payments for Healthcare

(1993-94 and 2004-05, in %)

State 1993-94 2004-05
Inpatient Ambulatory Medicine Other Inpatient Ambulatory Medicine Other
Care Care Care Care
Bihar 0.73 7.71 90.00 1.57 3.95 10.51 84.14 1.4
Orissa 0.81 4.86 93.13 1.20 5.53 5.58 85.2 3.7
Rajasthan 1.64 4.48 86.81 7.08 7.62 4.41 83.11 4.86
Uttar Pradesh 1.79 3.84 92.19 2.18 8.32 5.38 81.86 4.43
Himachal Pradesh 2.21 2.55 94.48 0.77 6.60 1.73 87.95 3.71
Punjab 2.27 5.29 91.44 1.00 17.91 7.68 67.46 6.94
Madhya Pradesh 2.84 7.74 85.92 3.51 12.21 13.92 71.27 2.59
Haryana 4.18 5.24 89.10 1.47 15.71 9.07 70.11 5.11
Assam 4.26 6.41 83.03 6.30 9.17 7.42 78.77 4.63
West Bengal 6.60 13.67 77.87 1.87 12.36 17.30 65.80 4.54
Karnataka 7.07 13.18 67.49 12.26 14.98 16.06 65.17 3.79
Andhra Pradesh 7.64 14.98 75.61 1.78 12.37 17.00 67.09 3.54
Maharashtra 7.83 18.54 71.00 2.62 17.66 15.37 60.82 6.15
Gujarat 8.33 13.05 75.57 3.05 18.2 12.94 64.16 4.7
Tamil Nadu 9.61 17.77 67.63 4.99 13.69 18.09 66.56 1.67
Kerala 11.05 5.48 77.45 6.03 23.08 9.89 62.68 4.34
India 5.06 11.39 81.60 1.95 12.94 11.58 71.17 4.31

Drugs and medicine are the same.

During the study period, the highest increase in OOP payments on healthcare as a share of total household consumption expenditure was observed in Kerala (4.7%), Himachal Pradesh (2.5%), Maharashtra (2%) and Gujarat (1.9%) (Table 2). Uttar Pradesh, one of the poorest states of India, has a very high OOP share compared with many high-income states, and this share increased during the period considered. This could be explained by the fact that government expenditure on healthcare declined at an annual rate of 1.54% from 1993-94 to 2002-03 (Economic Research Foundation 2006). Furthermore, the high healthcare utilisation of

Figure 1: Average OOP Share (%) in Indian States Ranked by Per Capita SDP (Rs) (1993-94 and 2004-05) 11 10 9 8 2004-05

7 6 5 4 3 2 1 0


0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

p rivate providers due to insufficient public healthcare infrastructure may have also contributed to the prevailing high OOP share in Uttar Pradesh (the proportion of population utilising healthcare services from the private sector is almost 90%).2

Since Bihar continues to be the poorest state in India, households have little choice but to divert their resources for other necessary food and non-food consumption. This could also be due to the poor availability of healthcare services, which has led to low healthcare utilisation (NSSO 2006). Karnataka’s decreasing OOP share is due to other factors. The annual growth rate of public expenditure on health in Karnataka (7.31%) sharply i ncreased between 1993-94 and 2003-04, and per capita spending by the Government of Karnataka on healthcare is the second highest in the country (Economic Research Foundation 2006). In addition to this, the state is also ahead of others in protecting households from uncertain health risks by a better risk-pooling mechanism, with nearly 10.5% of households reporting having at least one member covered by health insurance in 2005-06 (International Institute for Population Sciences and ORC Macro 2007).

There is significant variation in the OOP payments for healthcare within the country and its different states. During the period between 1993-94 and 2004-05, the distribution of OOP share in India became more skewed (Table 2). Except for West Bengal and Uttar Pradesh, the standard deviation of the share was at least twice the mean for all the other states. This feature is typical of healthcare expenditure distribution, indicating that many people spend little or nothing on healthcare, while a few sick individuals have high expenditures. The coefficient of variation is the greatest in Maharashtra, which also has a greater mean OOP share. On the other hand, West Bengal, with a high OOP share, had the l owest coefficient of variation, one that further declined from

1.94 in 1993-94 to 1.82 in 2004-05.

The Concentration Index (CIs) of OOP payment for healthcare, which rank households according to their income on the x-axis and their healthcare expenditure on the y-axis, indicate the p rogressivity of household healthcare payments. These indices show whether healthcare payments account for an increasing proportion of income as the latter rises. The CIs are positive for both periods, indicating that OOP payments on healthcare are disproportionately concentrated among the rich. The quintilespecific means of OOP payments also confirm this result. Notably, the trends of OOP health payments for healthcare as share of monthly household consumption expenditure increased during the reform period, particularly among the households belonging to richest, second richest and m iddle quintiles.

It is interesting to note that although Kerala has the highest average OOP healthcare spending share (10.5% of total consumption), there is very little variation in this share across consumption expenditure quintiles. This might be explained by the fact that Kerala is India’s most literate state, a place where households across the socio-economic strata have been exposed to an extensive healthcare infrastructure. Consequently, they are more conscious about their healthcare needs and are willing to spend a larger proportion of their resources on healthcare than households in other states. Although Maharashtra, Himachal Pradesh and Uttar Pradesh show as high an average share of OOP payments for healthcare as Kerala, they also show a steep gradient. The most dramatic declines in the gradient for OOP payments on healthcare can be seen in Haryana, Madhya Pradesh, West B engal and Bihar, while a steep increase in the income gradient has occurred in Karnataka and Punjab.

Catastrophic Payments: Catastrophic spending on health o ccurs when a household reduces its basic expenses over a certain p eriod of time, sell assets, or accumulate debts in order to cope with the medical bills of one or more of its members. Since there are no universally accepted cut-off values or thresholds for defining the catastrophic nature of healthcare payments, the catastrophic headcount has been defined here as the percentage of households spending more than a 5-25% of their total consumption expenditure on

Table 2: Out-of-Pocket Payments for Healthcare as a Percentage of Household Consumption Expenditure (1993-94 and 2004-05)

India Assam Bihar Madhya Orissa West Uttar Karnataka Andhra Gujarat Tamil Rajasthan Maharashtra Punjab Himachal Haryana Kerala
Pradesh Bengal Pradesh Pradesh Nadu Pradesh
Mean 5.51 2.05 2.92 5.82 4.48 6.15 7.38 3.78 5.62 5.51 4.56 4.76 6.82 5.96 6.30 5.60 10.36
CV 2.37 2.35 2.06 2.52 2.2 1.82 1.98 2.57 2.06 2.67 2.36 2.42 2.71 2.07 2.38 2.22 2.19
CI 0.122 0.093 0.094 0.109 0.182 0.129 0.085 0.174 0.142 0.068 0.167 0.125 0.092 0.127 0.121 0.047 0.023
Quintile means
Poorest 4.00 1.66 2.50 4.61 3.30 4.61 5.81 2.22 3.92 4.47 3.12 2.82 5.42 3.52 3.61 3.76 11.57
2nd poorest 5.01 1.86 2.65 5.60 5.55 5.41 6.73 3.56 5.61 4.55 4.16 3.92 6.48 4.67 4.91 4.92 8.87
Middle 5.92 2.02 3.12 6.31 6.21 6.38 7.64 4.18 6.66 6.29 5.55 5.24 6.94 4.94 6.68 5.70 9.30
2nd richest 6.69 2.29 3.38 6.90 5.51 7.91 8.82 5.41 7.51 6.43 5.65 5.23 6.77 7.20 7.66 6.51 11.59
Richest 7.09 2.79 5.70 7.95 6.26 8.12 8.69 5.00 6.79 5.77 6.89 6.38 8.81 7.11 7.33 5.92 10.47
Mean 4.39 1.68 3.10 4.34 3.05 4.45 5.52 4.37 5.36 3.64 3.99 4.15 4.80 5.43 3.82 5.03 5.62
CV 1.97 1.82 1.92 1.82 1.87 1.94 1.68 1.82 1.78 2.03 2.12 2.31 2.33 1.32 1.99 1.80 1.90
CI 0.106 0.096 0.141 0.166 0.164 0.170 0.101 0.055 0.097 0.044 0.139 0.091 0.0307 0.044 0.147 0.113 0.018
Quintile means
Poorest 3.25 1.31 2.14 2.81 1.97 2.66 4.19 3.63 3.91 3.37 2.72 3.35 4.19 4.83 2.40 3.58 5.00
2nd poorest 4.19 1.61 2.78 3.75 2.59 3.86 5.20 4.32 5.29 3.67 3.51 3.84 5.06 5.29 3.15 5.07 6.08
Middle 4.68 1.60 3.18 4.49 3.09 4.74 5.79 4.79 6.05 3.49 4.44 4.00 4.98 5.58 4.41 4.73 5.36
2nd richest 5.23 1.73 3.45 5.41 4.18 5.88 6.54 5.01 6.23 3.87 5.06 4.42 5.41 5.99 4.22 5.31 6.51
Richest 5.45 2.39 4.67 6.62 4.22 6.15 6.76 4.40 6.07 4.09 5.12 5.61 4.52 5.69 5.43 7.04 5.04
CV - Coefficient of variation and CI - Concentration index.
66 NOVEMBER 19, 2011 vol xlvi no 47 Economic Political Weekly


Table 3: Percentage of Households Incurring Catastrophic Payments for Healthcare in India and Select States (1993-94 and 2004-05) OOP Payments as Share of Total Household Consumption Expenditure 1993-94 2004-05 Threshold 5% 10% (95% CI) 15% 25% 5% 10% (95% CI) 15% 25% India Catastrophic headcount (Hc) 26.66% 12.97% (12.77-13.17) 7.45% 2.77% 29.98% 15.37% (15.17-15.57) 9.24% 4.15% Concentration index (CE) 0.1019 0.1024 0.1047 0.1471 0.1095 0.1186 0.1408 0.1689 Overshoot (Hg) 2.27% 1.34% 0.85% 0.39% 3.19% 2.12% 1.52% 0.90% Concentration index (CEg) 0.1002 0.1025 0.1084 0.1195 0.1327 0.1414 0.1467 0.1424 Assam Catastrophic headcount (Hc) 7.86% 1.96% (1.53-2.39) 0.77% 0.21% 9.25% 3.21% (2.98-3.45) 1.63% 0.59% Concentration index (CE) 0.1444 0.2035 0.1667 0.4944 0.0723 0.1360 0.1593 0.0614 Overshoot (Hg) 0.33% 0.13% 0.06% 0.03% 0.63% 0.34% 0.23% 0.13% Concentration index (CEg) 0.1462 0.1919 0.2214 0.2006 0.1075 0.1034 0.0791 0.0144 Bihar Catastrophic headcount (Hc) 21.03% 8.96% (8.37-9.54) 4.81% 1.27% 17.56% 5.76% (5.16-6.36) 2.88% 1.05% Concentration index (CE) 0.1151 0.1535 0.1987 0.2894 0.0784 0.0912 0.1690 0.2856 Overshoot (Hg) 1.39% 0.71% 0.39% 0.14% 1.08% 0.57% 0.37% 0.19% Concentration index (CEg) 0.1661 0.2148 0.2644 0.3910 0.1423 0.1836 0.2161 0.2115 Madhya Catastrophic headcount (Hc) 26.38% 12.98% (12.27-13.69) 7.40% 2.93% 30.57% 16.30% (15.35-17.24) 10.44% 4.85% Pradesh Concentration index (CE) 0.1670 0.1642 0.1822 0.2073 0.0898 0.1042 0.1259 0.1964 Overshoot (Hg) 2.26% 1.32% 0.83% 0.37% 3.58% 2.46% 1.80% 1.07% Concentration index (CEg) 0.1858 0.2039 0.2238 0.2908 0.1179 0.1236 0.1272 0.1039 Orissa Catastrophic headcount (Hc) 18.74% 7.68% (6.89-8.47) 3.67% 1.16% 24.02% 12.21% (11.30-13.11) 7.36% 3.08% Concentration index (CE) 0.1747 0.2099 0.26343 0.2306 0.1915 0.2122 0.1689 0.2285 Overshoot (Hg) 1.23% 0.64% 0.36% 0.14% 2.40% 1.56% 1.08% 0.61% Concentration index (CEg) 0.2122 0.2382 0.2574 0.3004 0.199043 0.1937 0.19223 0.1942 West Catastrophic headcount (Hc) 28.29% 14.25% (13.48-15.03) 7.48% 2.34% 34.99% 17.80% (16.74-18.86) 10.72% 4.85% Bengal Concentration index (CE) 0.1584 0.1552 0.1508 0.2426 0.1170 0.1240 0.1802 0.2213 Overshoot (Hg) 2.24% 1.22% 0.70% 0.28% 3.50% 2.25% 1.55% 0.84% Concentration index (CEg) 0.1802 0.1989 0.2398 0.3292 0.1574 0.1770 0.19056 0.1822 Uttar Catastrophic headcount (Hc) 31.76% 16.57% (15.89-17.26) 10.09% 4.09% 39.66% 20.24% (19.50-20.99) 12.41% 5.88% Pradesh Concentration index (CE) 0.0746 0.0911 0.0883 0.1478 0.0755 0.0919 0.1062 0.1394 Overshoot (Hg) 3.01% 1.86% 1.22% 0.56% 4.42% 2.99% 2.20% 1.34% Concentration index (CEg) 0.1097 0.1275 0.1488 0.2125 0.0932 0.0995 0.0988 0.0854 Karnataka Catastrophic headcount (Hc) 26.60% 11.82% (10.93-12.70) 6.79% 2.60% 22.81% 9.87% (8.78-10.96) 5.15% 2.26% Concentration index (CE) 0.0535 0.0622 0.0449 0.0439 0.1411 0.1485 0.21859 0.3775 Overshoot (Hg) 2.15% 1.26% 0.81% 0.38% 1.84% 1.10% 0.76% 0.42% Concentration index (CEg) 0.0341 0.0238 0.0116 -0.0037 0.2154 0.2600 0.2934 0.2966 Andhra Catastrophic headcount (Hc) 25.26% 11.88% (10.82-12.93) 6.50% 2.77% 32.23% 17.17% (16.37-17.98) 10.36% 4.69% Pradesh Concentration index (CE) 0.1116 0.0980 0.0743 0.0991 0.1222 0.1551 0.1781 0.2097 Overshoot (Hg) 2.04% 1.18% 0.76% 0.35% 3.39% 2.22% 1.55% 0.83% Concentration index (CEg) 0.0722 0.0504 0.0386 0.0769 0.1555 0.1645 0.1658 0.1437 Gujarat Catastrophic headcount (Hc) 21.42% 9.97%(8.76-11.17) 5.35% 2.24% 30.88% 16.76%(15.64-17.88) 9.47% 4.06% Concentration index (CE) 0.0741 0.0710 0.1007 0.2273 0.0655 0.0114 0.0456 0.0597 Overshoot (Hg) 1.63% 0.88% 0.52% 0.18% 3.27% 2.14% 1.52% 0.89% Concentration index (CEg) 0.1188 0.1574 0.2194 0.3634 0.0553 0.0589 0.0647 0.0744 Tamil Nadu Catastrophic headcount (Hc) 24.11% 11.59%(10.89-12.30) 6.74% 2.93% 26.08% 12.86%(12.24-14.31) 7.45% 3.15% Concentration index (CE) 0.1618 0.1391 0.1424 0.1436 0.1769 0.1983 0.2046 0.1646 Overshoot (Hg) 2.11% 1.28% 0.86% 0.44% 2.59% 1.67% 1.18% 0.70% Concentration index (CEg) 0.1065 0.0789 0.0573 0.0094 0.1609 0.1490 0.1303 0.0956 Rajasthan Catastrophic headcount (Hc) 24.33% 11.86% (10.96-12.77) 6.93% 3.18% 25.05% 13.20% (12.30-14.15) 8.37% 3.68% Concentration index (CE) 0.0949 0.1462 0.1680 0.1375 0.1251 0.1045 0.0944 0.1568 Overshoot (Hg) 2.28% 1.43% 0.98% 0.52% 2.77% 1.86% 1.32% 0.77% Concentration index (CEg) 0.0829 0.0683 0.0323 -0.0849 0.1258 0.1298 0.14437 0.1605 Maharashtra Catastrophic headcount (Hc) 30.42% 15.29%(14.59-16.0) 8.74% 2.85% 34.98% 19.46%(18.69-20.24) 11.92% 5.31% Concentration index (CE) 0.0640 0.0056 -0.0183 -0.0773 0.0851 0.0608 0.1028 0.0809 Overshoot (Hg) 2.60% 1.52% 0.94% 0.44% 4.33% 3.03% 2.26% 1.47% Concentration index (CEg) -0.0325 -0.0741 -0.1098 -0.1625 0.0813 0.0848 0.0892 0.0922 Punjab Catastrophic headcount (Hc) 35.04% 15.12%(14.01-16.23) 7.39% 2.90% 37.79% 17.25%(15.75-18.75) 10.05% 3.86% Concentration index (CE) 0.0399 0.0477 0.0700 0.0801 0.0423 0.1238 0.1424 0.2947 Overshoot (Hg) 2.44% 1.29% 0.76% 0.30% 3.06% 1.96% 1.38% 0.81% Concentration index (CEg) 0.0568 0.0722 0.0848 0.1237 0.1959 0.2593 0.31704 0.4002 Himachal Catastrophic headcount (Hc) 21.74% 10.21%(8.96-11.46) 6.30% 2.64% 33.14% 18.48% (16.97-19.98) 11.62% 5.03% Pradesh Concentration index (CE) 0.1913 0.1693 0.1861 0.2701 0.1689 0.1349 0.1752 0.1988 Overshoot (Hg) 1.88% 1.12% 0.73% 0.34% 3.86% 2.60% 1.86% 1.06% Concentration index (CEg) 0.1611 0.1559 0.1401 0.0816 0.1251 0.1222 0.1099 0.0384 Haryana Catastrophic headcount (Hc) 28.95% 16.55%(14.80-18.30) 10.08% 3.60% 34.07% 19.27%(17.60-20.94) 12.30% 5.48% Concentration index (CE) 0.0837 0.0777 0.1090 0.2898 0.0627 0.0113 -0.0193 -0.0496 Overshoot (Hg) 2.85% 1.77% 1.12% 0.48% 3.30% 2.28% 1.70% 1.05% Concentration index (CEg) 0.1422 0.1748 0.2260 0.3363 0.0184 0.0033 0.0013 0.0226 Kerala Catastrophic headcount (Hc) 34.21% 17.40%(16.27-18.52) 9.72% 2.97% 52.55% 32.42%(31.16-33.69) 20.45% 8.95% Concentration index (CE) 0.0228 0.0116 -0.0183 0.0576 0.0360 0.0156 0.0150 -0.0151Economic Political Weekly NOVEMBER 19, 2011 vol xlvi no 47 67 Overshoot (Hg) 3.00% 1.77% 1.13% 0.59% 7.05% 4.97% 3.68% 2.28% Concentration index (CEg) -0.0056 -0.0192 -0.0201 -0.0394 0.0098 0.0029 0.0003 -0.0084
healthcare. However, it is evident from Figure 3: Mean Catastrophic Overshoot (OOP 10%) in India and Selected States (1993-94 to 2004-05)


other empirical studies that 10% of total expenditure is widely accepted as the


standard, as this represents an approximate threshold at which the household is


forced to cut down on subsistence needs, sell productive assets, incur debts or be


i mpoverished (van Doorslaer et al 2006). The impact of the increase in the share


of OOP expenditure can be seen in the i ncidence of catastrophic expenditure


(Table 3, p 67). It is important to note that Ass Bih Kar Ori the catastrophic character of OOP payments increased between the two time points at the 5%, 10%, 15% and 25% thresholds. The catastrophic healthcare expenditure incidence (OOP 10%) i ncreased from 13.1% in 1993-94 to about 15.4% in 2004-05. The catastrophic headcount was more than 4% even at the highest defined threshold level (OOP 25%) in 2004-05, and the percentage of households falling into the “catastrophic” bracket i ncreased substantially, from a low level of 2.77% in 1993-94.

The proportion of households facing catastrophic OOP health payments varied widely among states, from 3.46% in Assam to 32.42% in Kerala (Table 3) in 2004-05. A similar pattern in catastrophic health payments was also observed in 1993-94, when catastrophic headcounts were prevalent mostly in high- and m iddle-income states (except Uttar Pradesh) at lower threshold l evels. However, at the highest threshold level (25% of total consumption expenditure), many poorer states such as Madhya Pradesh, Uttar Pradesh and Rajasthan had higher levels of catastrophic headcount than some of the high-income states such as Punjab, Maharashtra, Gujarat and Tamil Nadu. The pattern has not changed much even after a decade or so. In 2004-05, with the exception of two poor states, Madhya Pradesh and Uttar Pradesh, catastrophic headcount at every threshold level continued to be concentrated among the relatively developed states (Figure 2). However, two higher-middle-income states, Tamil Nadu and

Figure 2: Percentage Change in Catastrophic Expenditure (OOP 10%) in India and Selected States (1993-94 to 2004-05)


Bih Kar TN Raj Ass Pun India Har MP WB UP Mah Ori AP Guj HP Ker






K arnataka, have a substantially lower catastrophic headcount than other states at every threshold level.

CIs, which reflect how the proportion of households exceeding the threshold vary across the income distribution, are presented in Table 3. At each threshold, the incidence of catastrophic health payments was concentrated among the rich households in both 1993-94 and 2004-05 and increased between the two time points studied. Even if the threshold is raised from 5% to 25% of total


1993-94 2004-05

TN Raj Pun India Guj AP WB Har MP HP UP Mah Ker

consumption expenditure, the proportion of rich households with catastrophic expenditure still increases for both years. However, it is important to note that rich households are more likely than poor ones to spend their savings on healthcare and thus are less likely to experience real impoverishing impact of such expenditure (Berman et al 2010).

The intensity of catastrophic payments is measured by the amount by which OOP payments exceed the defined threshold (for example, 10% of total expenditure); this margin is referred to as the “catastrophic overshoot” (Wagstaff and van Doorslaer 2003). Since wealthier households spend a larger fraction of their income on healthcare than poor ones do, they are more likely to overshoot the threshold by a larger amount. This holds true irrespective of the threshold, though for each threshold there was a greater concentration of overshooting among the better off in 2004-05 than in 1993-94 (Table 3). Defining the catastrophic payment as 10% of total consumption expenditure, Kerala has the highest mean overshoot (Figure 3). Also, the mean overshoot pattern across states (presented in Figure 3) is akin to the pattern depicted by the catastrophic headcount. However, a significant amount of variation exists across states in the distribution of c atastrophic healthcare payments across income classes.

The Impoverishing Impact of Healthcare Spending: The i mpact of OOP payments on various measures of poverty over the period in question is examined here. Table 4 (p 69) presents the poverty headcount ratio, both gross and net, of OOP p ayments on healthcare for India in 1993-94 and 2004-05. The pre-OOP poverty headcount ratio in India was 36% in 1993-94 and 27.6% in 2004-05.

OOP payments increased the poverty ratio by 4 percentage points in 1993-94 and 4.4 percentage points in 2004-05. In other words, 35 million people in 1993-94 and 47 million people in 2004-05 were pushed into poverty by the need to pay for healthcare services. The poverty gap comparisons across years are most meaningful when normalised poverty gaps are used: i e, when poverty gaps are divided by the poverty line (Wagstaff and van Doorslaer 2003). The increase in the normalised gap because of OOP payments was 1.4 percentage points in 1993-94 and 1.8 p ercentage points in 2004-05.

5 Discussion

OOP payments are the principal means of financing healthcare in most low-income countries, and India follows this pattern.

NOVEMBER 19, 2011 vol xlvi no 47


This article has presented data which suggests that new policies have had a major impact in increasing the incidence of catastrophic expenditure and impoverishment. However, there could be alternate explanations. The analysis shows that the OOP payments for medical care increased between 1993-94 and 2004-05. On average, households spent 5.5% of total consumption expenditure on healthcare in 2004-05 compared to 4.4% in 1993-94. Table 4: OOP Payments for Healthcare: Poverty Headcounts and Poverty Gaps, India

(1993-94 and 2004-05)

Poverty Measures 1993-94 2004-05
Poverty headcounts* (in %)
Prepayment headcount (pre-Hp) 36.0 27.6
Post-payment headcount (post-Hp) 40.0 32.0
Poverty impact – headcount (post-Hp - pre-Hp) 4.0 4.4
Poverty gaps (in Rs)
Prepayment gap (pre-G) 18.77 23.4
Post-payment gap (post-G) 21.87 30.6
Poverty impact – gap (post-G - pre-G) 3.1 7.2
Normalised poverty gaps (in %)
Prepayment normalised gap (pre-NG) 8.4 5.8
Post-payment normalised gap (post-NG) 9.8 7.6
Normalised poverty impact (post-NG -pre-NG) 1.4 1.8

Hp - Poverty headcount, G - Poverty gap, NG -Normalised poverty gap.

This may be attributed to medical inflation that has been presumably higher than the overall price level for goods and services in the economy during the period. An increase in healthcare use from private sector can also partly explain the rise in OOP healthcare expenditure.

The empirical evidence described here shows that the trends of OOP health payments for healthcare as share of monthly household consumption expenditure increased in greater proportion during the period among the households belonging to richest, second richest and middle quintiles than poorer quintiles. These r esults indicate the rising trend of over medicalisation among the richer quintiles.

There are considerable inter-state differences in the mean OOP budget. The results suggest a positive relationship between the share of OOP health payments and the level of economic development of states measured by the per cap

were relatively better in this state. On the other hand, in Uttar Pradesh, the OOP payment share is the second highest in the country despite very low public health spending.

Drugs accounted for 61-88% of the total OOP payments across states, which is several times higher than in established market economies and which clearly points to the overuse of drugs in I ndia. One reason for the high reported expenditure on drugs could be the difficulty of obtaining an accurate picture of the breakdown between outpatient care and drugs for institutional care. For example, rural practitioners and informal healthcare providers tend to give drugs as part of their service and charge a single amount. Also, since the poor have very limited access to professional healthcare services, they often opt for selfmedication and end up spending a large amount on medicines. It is argued that the incentives provided by the pharmaceutical companies in India to the physicians have also contributed to the i rrational use of medicines. Hospitalisations accounted for only 13% of OOP expenditure at the all-India level in 2004-05. The distribution of OOP payments on inpatient care, ambulatory care, medicines and other types of care varied considerably across states. While the households in lower-income states spent a higher fraction of OOP payments on medicine, their counterparts in higher-income states spent a higher fraction on inpatient care. One possible explanation could be that the states with low SDP (and possibly low per capita government spending on healthcare) would have less medicines in the pharmacies compared to betteroff states forcing the patients to purchase medicines from the market and hence incurring higher OOP payments on medicine.

The analysis indicates that catastrophic healthcare expenditure incidence (OOP 10%) increased to about 15.4% in 2004-05 from 13.1% in 1993-94. Meanwhile, 4% of households fell into the “catastrophic bracket” in 2004-05 (by spending more than 25% of their total consumption expenditure) – a substantial increase from a low level of 2.8% in 1993-94. There are important differences in the incidence of catastrophic health payments across states. Catastrophic health expenditures most often stayed at a low threshold (compris

ing a smaller share of total household ex-

Table 5: People Impoverished due to OOP Payments

ita SDP. One possible reason could be the penditure) in economically better-per

(1993-94 and 2004-05)

fact that in high income states, the prev-forming states. However, at the highest

States/India 1993-94 2004-05

alence of non-communicable diseases is % Number % Number threshold level – i e, 25% of total expendi

higher which could account for the Assam 1.88 4,38,263 1.70 4,73,926 ture – many of the poorest states such as

higher OOP expenditure on healthcare. Andhra Pradesh 4.07 27,96,568 2.76 18,32,173 Madhya Pradesh, Uttar Pradesh and Ra-

Apart from income and the availability Karnataka 4.29 20,02,380 3.86 21,20,144 jasthan had higher levels of catastrophic

of health services, the mechanism of healthcare financing seemed to play an important role towards deciding state differences in OOP spending on healthcare. Where public healthcare investment and insurance coverage were higher, the OOP payment share was lower (Karnataka). However, this does not explain the full amplitude of OOP payment share differ-



Tamil Nadu

Himachal Pradesh






West Bengal

3.50 31,14,549 2.71 23,86,664
3.71 7,82,497 3.45 8,75,748
3.67 21,07,512 3.33 21,34,396
2.66 1,45,811 4.54 2,86,428
3.72 6,42,442 4.36 9,78,820
3.60 11,78,778 4.32 16,45,272
3.68 17,00,518 4.71 28,25,246
3.33 14,30,416 4.99 26,59,171
3.95 32,43,734 4.96 50,71,038
4.70 33,18,942 5.01 41,91,346

headcount. The incidence of catastrophic expenditure increased substantially in Kerala (15%), Himachal Pradesh (8.3%), Gujarat (6.8%) and Andhra Pradesh (5.3%), where the OOP payments share also increased between the two time points. Surprisingly, in Gujarat, the CI value decreased from 0.07 to 0.01 for catastrophic expenditure, indicating that has gone far t owards containing the impact of healthcare costs on poor insured households (Ranson and Akash 2003). This suggests the need for providing protection to the remaining uncovered population against the financial risk of illness. The distribution of catastrophic payments also differs across states. Barring a few states, catastrophic expenditure is more evenly distributed in economically better-performing states than in their disadvantaged counterparts. In most of the poorest states, it is the richer households that can afford to spend a larger fraction of their resources on healthcare, while the poorer ones are not in a position to divert their r esources from other needs.

ences by state. For instance, the OOP Madhya Pradesh 4.79 32,48,927 5.47 35,01,128 the poorest households were making
payment share reported in Maharashtra Kerala 4.33 12,91,691 6.15 20,11,480 more catastrophic health payments. Im
was much higher even though public Uttar Pradesh 5.33 77,90,750 6.64 1,17,11,234 portantly, Gujarat is one of those states
i nvestment and insurance coverage India 4.0 3,52,17,191 4.40 4,73,76,688 where community health insurance (CHI)
Economic Political Weekly NOVEMBER 19, 2011 vol xlvi no 47 69

However, contrary to the hypothesis that an increase in OOP payments leads to a reduction (or regression) in the progressivity of the financial burden of healthcare, the results suggest that at every threshold, the incidence of catastrophic health payments became more concentrated among rich households over the p eriod 1993-94 to 2004-05 – both across India and in most of the selected states. This has to do with the limitations of the methodological approach adopted in this study. The main problem with its focus on catastrophic payments and impoverishment is that it misses a huge number of households that do not have the financial capacity to utilise healthcare services and therefore could not be quantified (Pradhan and Presscott 2002).


1 Expenditure on institutional care includes (i) purchase of drugs and medicines; (ii) payments for diagnostic tests; (iii) medical fees; (iv) payments made to hospitals and nursing homes for medical treatment; and (v) others. The expenditure for non-institutional care are the same for the first three items. The other types of expenditure recorded under this are (i) family planning appliances including intrauterine devices (IUDs), oral pills, condoms, etc, and (ii) others.

2 Author’s own calculation from the 60th round of the NSSO data collected in 2004 on healthcare utilisation.


Berman, P, R Ahuja and L Bhandari (2010): “The Impoverishing Effects of Healthcare Payments in India: New Methodology and Findings”, Economic Political Weekly, 45(16): 65-71.

Bhat, R (1996): “Regulation of the Private Health Sector in India”, International Journal of Health Planning and Management, 11: 253-74.

Chaudhuri, A and K Roy (2008): “Changes in Out-of-Pocket Payments for Healthcare in Vietnam and Its Impact on Equity in Payments, 1992-2002”, Health Policy, 88(1): 38-48.

Commission on Macroeconomics and Health (2001): Macroeconomics and Health: Investing in Health for Economic Development (Geneva: World Health Organisation).

Economic Research Foundation (2006): Government Health Expenditure in India: A Benchmark Study, New Delhi.

Garg, C and a Karan (2009): “Reducing Out-of-Pocket Expenditures to Reduce Poverty: A Disaggregated Analysis at Rural-Urban and State Level in India”, Health Policy and Planning, 24(2): 116-28.

International Institute for Population Sciences (IIPS) and ORC Macro (2007): National Family Health Survey (NFHS-3), 2005-06, India: Volume I, Mumbai, IIPS.

Mooij, J and M Dev (2002): “Social Sector Priorities: An Analysis of Budgets and Expenditures in India in the 1990s”, Development Policy Review, 22 (1): 97-120.

It is noted that despite the greater concentration of catastrophic payments among better-off households in the majority of the states, OOP payments aggravated the prevalence and intensity of poverty in India over the period 1993-94 to 2004-05 (Table 5, p 69).

The results of this paper imply that lower- and middle- income households bear the brunt of the ongoing healthcare reforms. The evidence points towards higher incidences of i mpoverishment among these populations. Therefore, a rather broad-based risk pooling and prepayment measure (balancing between sick and healthy) would seem to be a better financing strategy as it would limit OOP spending, increase financial protection, reduce the risk of impoverishment and ensure the utilisation of healthcare services by the poorest of the poor. Social health protection mechanisms may be more suitable for a country like India with a dominant informal sector. Alternatively, high OOP payments for healthcare and their consequent effects on household living standards can be prevented by subsidising drugs for low-income households (from lower-middle-class households to those living below the poverty line) and by increasing the contribution of both public and private-sector spending on healthcare, which would in turn reduce the house

hold burden.

National Commission on Macroeconomics and Health (2005): Financing and Delivery of Healthcare Services in India, Government of India, New Delhi.

National Sample Survey Office (2006): Morbidity, Healthcare and the Condition of the Aged (NSSO 60th Round, January-June 2006) (New Delhi: NSSO, Ministry of Statistics and Programme Implementation), Government of India.

O’Donnell, O, E van Doorslaer et al (2007): “The Incidence of Public Spending on Healthcare: Comparative Evidence from Asia”, The World Bank Economic Review, 21(1): 93-123.

OECD and WHO (2003): DAC Guidelines and Reference Series – Poverty and Health (Paris: Organisation for Economic Cooperation and Development and World Health Organisation).

Peters, D H, A S Yazbeck, R Sharma, G N V Ramana, L Pritchett and A Wagstaff (2002): Better Health Systems for India’s Poor: Findings, Analysis, and Options (Washington DC: The World Bank).

Pradhan, M and N Prescott (2002): “Social Risk Management Options for Medical Care in Indonesia”, Health Economics, 11(5): 431-46.

Ranson K and A Akash (2003): “Community-based Health Insurance: The Answer to India’s Risk Sharing Problems?”, Health Action, March: 12-14.

Sen, G, A Iyer and A George (2002): “Structural Reforms and Health Equity: A Comparison of NSS Surveys, 1986-87 and 1995-96”, Economic Political Weekly, 37(14): 1342-52.

Thakur, H and S Ghosh (2009): “User-fees in India’s Health Sector: Can the Poor Hope for any Respite?”, Artha Vijnana, 51(2): 139-58.

van Doorslaer, E, O O’Donnell, R P Rannan-Eliya, A Somanathan et al (2006): “Effect of Payments for Healthcare on Poverty Estimates in 11 Countries in Asia: An Analysis of Household Survey Data”, Lancet, 368 (9544): 1357-64.

Wagstaff, A and E van Doorslaer (2003): “Catastrophe and Impoverishment in Paying for Healthcare: With Applications to Vietnam 1993-98”, Health Economics, 12: 921-34.

World Bank (2001): The World Development Report: Attacking Poverty (Washington DC: World Bank).

– (2004): The Millennium Development Goals for Health: Rising to the Challenges (Washington DC: World Bank).

WHO (2005): “Sustainable Health Financing, Universal Coverage and Social Health Insurance”, 115th World Health Assembly Resolution EB115.R13, World Health Organisation, Geneva.

– (2008): World Health Report, Geneva.

Xu, K, D Evans, K Kawabata, R Zeramdini and C Murray (2003): “Household Catastrophic Health Expenditure: A Multicountry Analysis”, The Lancet, 362: 111-17.

For the Attention of Subscribers and Subscription Agencies Outside India

It has come to our notice that a large number of subscriptions to the EPW from outside the country together with the subscription payments sent to supposed subscription agents in India have not been forwarded to us.

We wish to point out to subscribers and subscription agencies outside India that all foreign subscriptions, t ogether with the appropriate remittances, must be forwarded to us and not to unauthorised third parties in India.

We take no responsibility whatsoever in respect of subscriptions not registered with us.


Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here


To gain instant access to this article (download).

Pay INR 200.00

(Readers in India)

Pay $ 12.00

(Readers outside India)

Back to Top