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ARTICLE : Financing Healthcare in India
Thursday, 26 April 2012 03:30


Financing Healthcare in India

Health care can absorb a very large quantity of investments from the government and individuals and yet leave millions of people, especially the poor who suffer from a high disease burden, inadequately covered, resulting in the vicious cycle of unproductive investment Merely investing more in health is unlikely to improve the health status of the population. It is essential that policies and strategies are developed to promote equitable access to preventive and curative services so that there is an improvement in health indices, generating the virtuous cycle of productive investment.

Health and Medicareas Economic Goods

Should health care be counted as consumption good or an investment good? To the extent that it keeps a person in the optimal state of mental, physical and social well-being, and to the extent that the recipient of this care enjoys this well-being, health has to be considered as a consumption good and an end in itself. But to the extent that this optimum state of well-being raises the productivity of the person, health can be considered as a means of production or capital good. Hence it becomes extremely difficult to put health in either category. Health is normally considered as capital good and expenditures on health as investment. Henry E. Sigerist (Panchamukhi, 1980) aptly summarizes the approach towards this problem. “Sickness not only creates suffering but is an economic loss. The sick man cannot work and therefore loses his wages. Illness frequently disables a man permanently or for a long time. He becomes unemployable, and the result may be that the whole family drops in the social scale. Thus, illness creates poverty, which in turn creates more illness. Sickness, however, affects economically not only the sick man and his family but society as well, in that it deprives it of the diseased citizen’s labour temporarily or permanently.

In every country thousands of people die prematurely every year, from diseases that could have been prevented or cured. Every such case is a capital loss to the nation”. A further question related to the above discussion is whether health is a private good or a public good? It is difficult to provide a categorical answer to this question, because health, in its different aspects , is a little of both. However, since health is a necessity for social welfare, it becomes imperative for the state to provide for it through collective payment (public budget), in addition to the private sector. Thus, it can be called as merit want good (Musgrave and Musgrave 1985), as it is considered meritorious from the point of view of social well-being.

The presence of externalities and information asymmetries make state intervention necessary in the healthcare sector, especially in the area of public health. Such intervention can take the form of price subsidies or direct public provision of services. There are also problems of “incentive incompatibility”, in which the interests of the patients and the health care provider do not coincide. This creates the need for government intervention in the form of regulation. Such regulation can take the form of licensing of health care providers, limits on advertising, insistence on some preoperational norms that prohibit low quality, etc. Therefore both for ensuring efficiency and equity, public provision of health care becomes necessary.

International Experience

In most developed countries, public financing which accounts for around 80% per cent of all health expenditure, whether through state revenues and/or social insurance, has been the critical component in realizing universal access with equity. In contrast, in most developing countries the reverse is true i.e. 70-80 percent of health expenditure is met by individuals from their private resources. Health expenditure is highly unequal across the globe. As is to be expected, developed countries spend the most on health per person. OECD countries accounted for less than 20 percent of the world’s population in 2000 but were responsible for almost 90 percent of the world’s health spending. Therefore 80 percent of the world’s population spent only 10 percent of total expenditure on health.

Health Expenditure by States and Union Territories

Table-4 show the pattern of health expenditure by states and UTs of India It is well known that health expenditure in India is dominated by private spending. To a large extent this is a reflection of the inadequate public spending that has been a constant, unfortunate feature of India’s development in the past half century. More recent estimates suggest that the role of households has increased even more substantially in the most recent period. According to the Report of the National Commission on Macro Economics and Health, 2005, households undertook nearly three-fourths of all the health spending in the country. Public spending was only 22 percent, and all other sources accounted for less than 5 percent. The exceptionally high burden placed upon households in the Indian context reflects the inadequate quantity and quality of public health service delivery.

Plan versus Non-plan Expenditure

Within government health spending in 2002, total plan expenditure comprised about 30.45 per cent and with non-plan spending about 69.55 per cent. Non-plan dominate at the state level and plan dominate at the centre. It is the state governments that are the principal owners and managers of the public sector service delivery system and states have the main responsibility for recurrent cost support. However, the central government, through plan financing, is the principal actor in making investment decisions for new infrastructure programmes.

In the non-plan head, Punjab (86.44 per cent), Gujarat (83.27 per cent), West Bengal (79.21 per cent) and Andhra Pradesh (78.66 per cent) have the highest share among all the states, which shows more expenditure on staff salaries and maintenance. It is also significant that a greater proportion is taken up by revenue expenditure (essentially, the payment of salaries) rather than capital expenditure for creating much – needed basic physical infrastructure. The ratio o f Central Government spending to total State Government spending is currently around 1:2.


At present the services provided by our government are inadequate both in quality and quantity, and hence forces the poor to incur considerable expenditure on private health care which they can ill afford. In future, it is absolutely essential to arrest and reverse these trends. Since India’s level of government health spending is quite low in absolute terms as well as in comparison to some other Asian countries, increasing of the same is inevitable. Improved services of and access to government health facilities will have to continue as a major thrust area of the policy makers. At the same time it is necessary to regulate the expansion of the private sector health care market.