DRAFT Out - of - pocket Expenditures and Poverty : Estimates From NSS 61 st Round Indrani

Health care finance in developing and low income countries is still predominantly based on out-of-pocket (OOP) payments, and the lack of prepayment mechanisms like insurance. In the absence of insurance, an illness not only reduces welfare directly, it also increases the risk of impoverishment due to high treatment expenditures. It is now widely acknowledged that health care expenditures can drive individuals and households into poverty. The literature around out-of-pocket payments and its impact on the economic status of households has grown tremendously over the past. Catastrophic payments for health are defined in relation to the household resources, most often proxied by aggregate consumption. A simple ratio of health expenditure to consumption expenditure can be used to estimate how high the health spending of households is in comparison to their total consumption. A threshold of 10 percent is commonly used with the rationale that above this the household may be forced to sacrifice other basic needs, sell productive assets, incur debt or become impoverished A seminal work on catastrophic health expenditures in 59 countries published by Lancet (Xu et al (2003) indicated that there was wide variation in the proportion of households facing catastrophic payments from out-of-pocket health expenses. The authors identified three key preconditions for catastrophic payments as the availability of health services requiring payment, low capacity to pay, and the lack of prepayment or health insurance. The authors concluded that individual, particularly in poor households, can be protected from catastrophic health expenditures by reducing a health system's reliance on out-of-pocket payments and providing more financial risk protection. Another study from Burkina Faso (Su et al 2006) identified the key determinants of catastrophic health expenditure as economic status, household health care utilization especially for modern medical care, illness episodes in an adult household member and presence of a member with chronic illness. A given overall share of out-of-pocket financing may represent relatively little financial risk to households if it is low and is distributed more or less proportionally to capacity to pay. However, that is not the case and a multi-country analysis (Musgrove and Zeramdini 2001) indicates that at low incomes, the out-of-pocket share is high on average, and extremely variable, from about 20 to 80% of all health spending. With increasing income, not only does the average share fall sharply, but the range narrows. Several studies of Indian villages to determine why households descent into poverty (Krishna 2004, Krishna …