Are the Poor Too Poor to Demand Health Insurance?

Community based microinsurance has aroused much interest and hope in meeting health care challenges that face the poor. In this paper we explore how institutional rigidities, such as credit constraint, affect the demand for health insurance and how insurance could potentially prevent poor households from falling into the poverty trap. In this setting, we argue that the appropriate public intervention to generate demand for insurance is not to subsidize premium, but to remove these rigidities (i.e., ease credit constraint). Thus from an insurance perspective as well, our analysis highlights the importance of the poor having the appropriate saving and borrowing instruments. Journal of Microfinance Volume 6 Number 1 2 the poor has come to be viewed as an integral part of any poverty alleviation program (Holzmann & Jorgensen, 1999). Although the empirical literature on the impact of microinsurance schemes is limited, the available research suggests that microinsurance, if properly designed and implemented, can provide an effective mechanism for meeting the health care challenges of the poor. Microinsurance schemes meet these challenges by reducing out-of-pocket health expenses of poor households and improving their access to health care services. The potential upscaling, extending, and expanding of microinsurance programs crucially depends crucially on affordability, that is, to what extent resources for meeting health care costs can be mobilized by the people themselves. Limited reach and the coverage of the existing microinsurance programs alone are not sufficient reasons for the poor to question the affordability of premium, and hence justify their need for subsidizing premium. In this paper we explore the issue of affordability and demonstrate with the help of a simple analytical device how institutional rigidities, in particular credit or borrowing constraint, suppress low-income households’ demand for insurance, households that could otherwise afford to pay for insurance, and how households without insurance become vulnerable, forcing them into the poverty trap. This paper is organized in the following manner. In the next section we give a brief overview of microinsurance and highlight the importance of the affordability issue in the context of community-based health insurance schemes. After that we show with the help of a simple analytical device how easing credit constraint could potentially increase demand for microinsurance, thereby decreasing the risk of poor households falling into the poverty trap. In the following section we review appropriate government intervention in the light of our analysis. The last section concludes the paper. Rajeev Ahuja is a Senior Fellow at the Indian Council for Research on International Economic Relations (ICRIER). Email address: [email protected]. Johannes Jütting is a Senior Economist at OECD Development Centre. Email address: [email protected]. Too Poor to Demand Health Insurance? Volume 6 Number 1 3 Overview: Health Risks, Microinsurance, and Affordability Insurance is not the only way to deal with risks, and not all risks are insurable. However, health risks such as those relating to illness, injury, disability, maternity, and the like are considered to be eminently insurable, as these risks are mostly independent or idiosyncratic (i.e., not correlated among community members). Moreover, among the several risks that face poor households, health risks are considered to be crucial as they have destabilizing effects on household finances—directly, by forcing health expenditure and indirectly, by affecting the income earning capacity of households (Asfaw, von Braun, Admassie, & Jutting, 2002). Hence the need for a twopronged strategy: (1) an aim at improving the health status of the poor, and (2) an aim at protecting the poor from the financial consequences of illness of other medical problems. For this reason, microinsurance that essentially protects households against the financial consequences of illness is regarded as a complement to, not as a substitute for, other health interventions. Amidst shrinking government budgets, the failure of markets to reach the poor, and the widespread criticism of levying user charges, community based arrangements have aroused much interest and hope that health care challenges facing the poor can be met. Microinsurance is considered to be an important financing tool to protect the poor from adverse financial consequences in the event of sicknesses or ill health. While the out-of-pocket expenditure on health care payments imposes great financial hardships on the poor, community based health insurance is an effective way to finance health care costs. Health insurance that is determined by pooling the risks of members participating in health insurance lessens the financial burden of members affected by illness. Indeed, several types of community based health insurance schemes have emerged in sub-Saharan Africa (Wiesmann & Jütting, 2000; Atim, 1998), Asia (Krause, 2000) and other regions (Bennett, Creese, & Monash, 1998; Jakab & Krishnan, 2001). Some of these schemes are community based, while others are based on membership in a particular group. In this paper these community based and member based arrangements are collectively referred to as community financing schemes. In some cases, a health insurance feature is embedded in the other types of functions that community or member based organizations provide. In fact, some microfinance programs have successfully introduced insurance on a limited scale (Morduch, 1999b). Community health care financing schemes are usually based on the following characteristics: voluntary membership, nonprofit objective, link to a health care provider (often a hospital in the area), risk pooling, and reliance on an ethic of mutual aid/solidarity. These finance schemes have an advantage in their ability to reach low-income people in rural areas who work in the informal sector and are otherwise difficult to reach and their ability to exploit social capital to bring about greater awareness, correct for adverse selection and moral hazard problems, encourage preventive measures, and increase access to health care. But community based schemes also have certain weaknesses, such as a low capital base, a low level of revenue mobilization, frequent exclusion of the poorest of the poor, small size of risk pool, limited management capacity, and isolation from more comprehensive benefits. However, the reach of existing microinsurance schemes is still limited although attempts are continually being made to involve more and more people by upscaling, extending and replicating the schemes. In extending the reach of microinsurance, demand side and supply side factors and other factors relating to design and development of schemes are important (Dror & Jacquier, 1999; Wiesmann & Jütting, 2000; Siegel, Always, & Canagarajah, 2001). However, this paper focuses only on the demand side factors, in particular on the issue of affordability. By and large the literature on demand side factors is limited. A few microlevel studies that have tried to estimate demand for health insurance based on the willingness and the ability to pay for it have had positive findings. A survey-based study on willingness Journal of Microfinance