Health and the social sector: economics, institutions and policy

Health turns up in ESI in two ways. Sometimes it is the whole question: public health spending, insurance, primary care. More often it hides inside another topic: poverty (illness is a leading reason households fall back into it), the demographic dividend (a sick workforce is not a dividend) or banking (a medical shock is a common reason small loans go bad). A candidate who can explain why health markets fail, and what the Indian state has built in response, writes a better answer on all of these.

Why health is an economic issue

Health is human capital. A healthier worker produces more, misses fewer days and lives longer, so investment in education and skills pays off over more years. Child nutrition matters most of all: stunting in the first years of life affects cognitive development, which shows up later as lower learning and lower earnings.

Health spending is also a poverty trap. When a household member falls ill, the family loses income and pays for treatment at the same time. Without insurance or savings, it sells assets or borrows at high rates. That is why illness appears in almost every study of how the near-poor become poor.

Why the market alone does not deliver good health

This is the graduate-level core, and most answers skip it.

• Externalities: vaccination and disease control protect people who did not pay for them. Left to the market, they are under-supplied.
• Public goods: disease surveillance, sanitation campaigns and health information are non-rival and hard to charge for.
• Information asymmetry: the doctor knows far more than the patient, so the patient cannot judge what treatment they need. This allows supplier-induced demand, such as unnecessary tests.
• Insurance market failures: adverse selection (those who expect to fall ill buy more cover, pushing premiums up) and moral hazard (insured people, or their providers, use more care). Private insurers respond by excluding the sick and the poor.
• Merit good: society values health above what individuals would choose to spend on it, especially for children.

Measuring health outcomes

How India's health system is organised

Public health, sanitation, hospitals and dispensaries are in the State List of the Seventh Schedule, so states run most public services and bear most of the spending. The Centre shapes the system through national programmes, funding and the Concurrent List subjects such as the prevention of infectious diseases spreading between states, and population control and family planning.

The public system has three tiers:

Norms are lower in hilly and tribal areas (about 3,000, 20,000 and 80,000). Alongside this sits a very large private sector, from single-doctor clinics to corporate hospitals, which provides most out-patient care in both rural and urban India.

Who pays: out-of-pocket and catastrophic spending

Total health expenditure is paid by government, by insurers and employers, and directly by households at the point of care. The last part is out-of-pocket expenditure (OOPE). It is the most regressive way to pay for health, because it falls hardest on the sick and the poor. Medicines and out-patient visits make up a large share of it, which matters because hospital insurance does not cover them.

The National Health Policy 2017 set a goal of raising government health spending to 2.5% of GDP by 2025 and cutting the share of household out-of-pocket spending.

Worked example: catastrophic spending

Health spending is called catastrophic when it crosses a threshold of household budget. The SDG indicator on financial protection uses thresholds of 10% and 25% of total household spending.

A household spends ₹1,80,000 a year on consumption. A family member is hospitalised, and after insurance the household pays ₹30,000 itself.

1. Share of the budget: 30,000 ÷ 1,80,000 = 0.1667, or about 16.7%.
2. That is above the 10% threshold and below 25%, so it is catastrophic at the 10% line.
3. Now suppose the household's consumption was just above the poverty line before the illness. After paying ₹30,000, what is left for everything else may fall below the line. That is impoverishing health spending.

The lesson for policy: reducing OOPE for medicines and out-patient care may protect more households than raising the hospital insurance cover.

The main programmes

The finance angle

This is where an RBI answer can stand out. Health shocks are a leading cause of default on microfinance and small loans, so health cover is a form of credit-risk protection. Low-premium insurance sold through bank accounts (such as the government's accident and life cover schemes), micro-insurance and hospital cover all reduce the chance that a family borrows expensively after an illness. Health infrastructure is also a lending opportunity; hospitals in smaller towns need long-term finance.

Model answer outline (15 marks)

Question: "High out-of-pocket health expenditure is both a health problem and a poverty problem." Examine, and suggest measures.

1. Introduction: define OOPE; note that it is the most regressive way to finance health.
2. Health problem: people delay or skip care; weak primary care means late diagnosis and costlier hospital treatment.
3. Poverty problem: catastrophic and impoverishing spending; asset sales and high-cost debt; the near-poor fall back.
4. Why it persists: market failures in health; medicines and out-patient care outside insurance; low public spending; staff shortages in rural areas; weak primary care; the rising burden of non-communicable diseases.
5. What has been done: NHM, Ayushman Arogya Mandirs, PM-JAY, generic medicine stores, free drugs and diagnostics.
6. Way forward: stronger primary care; free essential medicines and diagnostics; move towards the NHP 2017 spending goal; include out-patient care in cover; regulate prices and quality; use health data for targeting.
7. Conclusion: financial protection is part of poverty policy, not an add-on.

Short model answer (10 marks)

Question: Why is primary health care a better investment than hospital insurance alone?

Most illness can be prevented or treated early at the primary level: immunisation, antenatal care, screening for diabetes and hypertension, and treatment of common infections. When primary care is weak, patients arrive at hospitals late, when treatment is costlier and outcomes worse.

Hospital insurance such as PM-JAY protects families from large bills, but it pays only after someone is admitted. Most household health spending goes on medicines and out-patient visits, which hospital cover does not reach. Insurance also cannot fix the underlying market failures: patients cannot judge what care they need, and providers may over-treat when they are paid per procedure.

Strong primary care reduces the need for hospitalisation and lowers out-of-pocket spending on the most common needs. It also addresses the rising burden of non-communicable diseases, which need continuous screening and management rather than one-off admissions. Insurance and primary care work best together: insurance for rare, expensive events and a well-staffed public primary system for everyday care.

Practice questions

1. The maternal mortality ratio is expressed per how many live births?
   • 1,00,000. The infant mortality rate is per 1,000.
2. In which list of the Seventh Schedule are public health and hospitals placed?
   • The State List.
3. What population does a PHC serve in the plains under the standard norm?
   • About 30,000.
4. What target did the National Health Policy 2017 set for government health spending?
   • 2.5% of GDP by 2025.
5. A household spends ₹2,40,000 a year and pays ₹30,000 out of pocket for health. Is this catastrophic at the 10% threshold?
   • Yes. 30,000 ÷ 2,40,000 = 12.5%.
6. Which insurance failure describes sicker people buying more cover?
   • Adverse selection.

What to do next

• Write the five health-market failures from memory with one Indian example each.
• Note the latest IMR, MMR and OOPE figures with their source and year.
• Redo the catastrophic spending example at the 25% threshold.
• Read the poverty and inequality guide and the education and demography guide; health links to both.