Health Insurance – Significance & Challenges – Explained Pointwise

According to the latest NSS data of the 80th round on “Household Social Consumption: Health”, while the health insurance coverage has increased considerably compared to the 2017-18 (75th round), this has not translated into a significant rise in the utilisation of the hospital care. A greater proportion of people are going to the private hospital – which is a concerning trend.
Universal Health Care (UHC), envisioned by the Bhore Committee (1946), remains distant for India even after eight decades. While PMJAY and SHIPs (State Health Insurance Programmes) have expanded formal coverage to over 80% of the population, they raise questions about sustainability, equity, and the future of India’s public health system.

Table of Content

What is the Status of Health Insurance Coverage in India? What is the Significance of health insurance? What are the various initiatives to expand the health insurance coverage? What are the Challenges related to health insurance in India? What should be the Way forward?

What is the Status of Health Insurance Coverage in India?

• National coverage rate: Currently, 47.4% of rural households & 44.3% of urban households are covered by some form of health insurance. This has been achieved by more than a 2.5 fold increase in coverage between 2017-18 & 2025 of government-financed health insurance (GFHI) schemes.
• Ayushman Bharat–PM-JAY: India’s largest public health insurance plan now covers 107 million families (over 40% of the population).
• Private insurance: Over 30% of insured individuals are covered by private plans, with premiums ranging from ₹5,000–₹20,000 per person per year.
• Out of Pocket Expenditure (OOP Expenditure):
  • Increased access to insurance coverage is failing to protect people from financial hardship. OOP expenditure on hospitalization has more than doubled in both rural & urban areas between 2017-18 & 2025.
  • Average OOP expenditure (excluding childbirth) is Rs 31,250 in rural areas & Rs 34,259 in urban areas.
  • Average hospitalization expenses in private hospitals have increased by 70% in rural areas & 80% in urban areas.
• Hospitalization Rate: While the insurance coverage has increased considerably, this has not translated into a significant rise in the utilization of hospital care. The hospitalization rate had decreased considerably.

  

  Source: The Hindu

What is the Significance of health insurance?

1. Preventing Catastrophic Expenditure (Out-of-Pocket Expenditure): India historically has had one of the highest rates of Out-of-Pocket (OoP) healthcare spending in the world. Health expenses, particularly for hospitalization (secondary and tertiary care), are a leading cause of families falling into poverty (“Medical Poverty”: About 7% of India’s population is pushed into poverty annually due to out-of-pocket healthcare expenses). Health insurance, especially schemes like PMJAY, absorbs these unpredictable & high costs.
2. Access to Quality Healthcare: Insurance enables timely access to private and public healthcare services, allowing for cashless treatment and routine or emergency procedures. It allows middle- and lower-income families to access private multi-specialty hospitals that offer shorter wait times and advanced medical technology – thus, it levels the playing field, ensuring that “quality” healthcare isn’t reserved only for the wealthy.
3. Reducing the Burden on Public Infrastructure: India spends only about 1.5-2% of its GDP on public health – one of the lowest globally. Without insurance, citizens clog public hospitals for every minor ailment and major surgery, leading to long wait times, lack of beds, and doctor burnout. When a significant portion of the population uses insurance in private hospitals, it decongests public hospitals. This allows the government to redirect its limited budget toward primary care rather than tertiary care.
4. Formalizing the Healthcare Sector: Insurance requires detailed record-keeping, standardized billing, and adherence to treatment protocols. This forces hospitals to adopt better transparency and accountability, which is essential for improving the quality of care and curbing over-billing practices.
5. Social Impact & Health Equity: Health insurance schemes, especially government-led ones like Ayushman Bharat, improve inclusivity by covering low-income, rural, and vulnerable populations. They contribute to improved national productivity, lower mortality, enhanced wellbeing, and reduction of catastrophic health expenditures.

What are the various initiatives to expand the health insurance coverage?

1. Ayushman Bharat – Pradhan Mantri Jan Arogya Yojana (PM-JAY):
   • AB-PMJAY is one pillar of the larger Ayushman Bharat scheme launched in 2018, a health initiative designed to provide equitable health coverage, especially for rural & economically weaker sections.
   • PM-JAY offers ₹5 lakh annual cover per family for hospitalizations.
   • Covers secondary and tertiary care, both public and private hospitals nationwide.
   • Significant extension in 2025 to individuals aged 70 and above. Under this decision, all senior citizens aged 70 and above will receive health coverage, regardless of their income. 
2. State Health Insurance Programmes (SHIP):
   • Rajiv Aarogyasri (AP, Telangana): Focused on BPL and serious illnesses.
   • Arogya Karnataka: Universal coverage aspirations with diagnostics, hospitalization.
   • Mahatma Jyotiba Phule Jan Arogya Yojana (Maharashtra): Provides cover up to ₹1.5 lakh per family.
   • CMCHIS (Tamil Nadu), Bhamashah Swasthya Bima (Rajasthan), and others provide cashless treatment and significant annual coverage.
3. Health & Wellness Centres (HWCs): Transformation of over 1.7 lakh sub-centres and PHCs into HWCs by 2024, offering primary healthcare and linking insurance benefits closer to communities.
4. Ayushman Bharat Digital Mission (ABDM): ABDM is creating unique digital health IDs (ABHA (Ayushman Bharat Health Accounts)) for every citizen. This infrastructure is vital for the future, as it will allow beneficiaries’ medical records and insurance claims to be linked digitally, making the entire process of enrollment and portability seamless. 
5. Key Regulatory Reforms in Health Insurance: To streamline compliance, enhance transparency, and strengthen policyholder rights, IRDAI has introduced several regulatory reforms in the health insurance sector:
   1. Shortening of Moratorium Period: Moratorium period in health insurance is a fixed timeframe after which insurance companies cannot deny claims on the grounds of non-disclosure and misrepresentation, except on grounds of established fraud.  IRDAI reduced the moratorium period from 8 years to 60 months (5 years) in 2024.
   2. Standardized 30-day free-look period: IRDAI introduced a standard 30-day free-look-period for policies with a term of one year or more. The free-look-period is the period given to a policyholder to assess and review the policy document.
   3. Premium Refund on Mid-Term Cancellation: In case of mid-term cancellation of the policy, insurers shall refund the premium or proportionate premium for the unexpired policy period.
6. GST Exemptions: Removal of GST from insurance premiums (2025) to make insurance more affordable. GST exemptions on individual and family floater health insurance premiums have significantly lowered the cost for middle-class families. 
7. 100% FDI: Allowing 100% Foreign Direct Investment in insurance companies is bringing in global capital and technology to reach rural India.
8. NIRAMAYA Health Insurance Scheme: Special affordable health insurance scheme for persons with disabilities, covering OPD and diagnostics. It provides affordable health insurance for PwD, offering up to Rs. 1 lakh coverage without pre-insurance medical test.
9. Mental Health Coverage: Expansion of benefits under Ayushman Bharat and private schemes to include mental health services.

What are the Challenges related to health insurance in India?

1. High Out-of-Pocket (OoP) Expenditure: Even with the growth of insurance, over 60% of total healthcare spending is still paid out-of-pocket by patients. This is due to the lack of coverage for Out-Patient Department (OPD) expenses which constitute the bulk of everyday medical costs. Most insurance only covers hospitalization. Even in public hospitals, patients incur significant expenses due to unavailability of medicines, diagnostic services, and high transport & other non-medical costs. 
2. The “Missing Middle”: A vast segment of the Indian population is too wealthy to qualify for the highly subsidized PMJAY but too poor or informally employed to afford comprehensive private insurance. This group, estimated at around 30% of the population, often faces the greatest financial distress during a medical crisis.
3. Complex Exclusionary Clauses: Private insurance policies are often highly complex, containing numerous and difficult-to-understand clauses, especially concerning Pre-Existing Diseases (PEDs). PEDs typically involve waiting periods of 2 to 4 years, meaning individuals with chronic conditions (like diabetes or hypertension) cannot access coverage immediately, defeating the purpose of buying insurance when they need it most.
4. Claim Denial and Disputes: High rates of claim rejection or partial payment, particularly in the private sector, erode public trust. This often stems from ambiguity in policy wording, non-disclosure of health conditions by customers, or arbitrary interpretation of “medically necessary” treatment by insurers.
5. Privatisation of Healthcare & Profit-seeking Behaviour: Health insurance in India promotes for-profit medicine. About two-thirds of the PM-JAY budget is spent on private, mainly profit oriented hospitals. India’s healthcare system, however, is dominated by poorly-regulated profit seekers. Health insurance reinforces this bias rather than correcting it.
6. Misdirected Focus: Health insurance also tilts the focus of the healthcare system towards hospitalisation, when investments in primary & outpatient care may be more urgent. Focus on strengthening the PHC would not only ensure accessible treatment but also reduce unnecessary hospital visits & their financial burden.
7. Lack of Awareness & Serious Utilisation Problem: The combined coverage of PM-JAY & SHIP is estimated to be as high as 80% of the population. However, a large % of this population do not seem to know about these schemes or how to use them even if they are nominally enrolled. According to the 2022-23 Health Consumption Expenditure Survey – only 35% of insured hospital patients in that year were able to use their insurance. This is the main reason why there is no strong evidence linking the health insurance schemes with substantial reduction in OoP health expenditure.
8. Discriminatory Treatment: Targeted health insurance schemes create the issue of discrimination between insured & uninsured patients. Private hospitals prefer an uninsured patient because commercial charges for healthcare are usually higher for them – often much higher than the insurance reimbursement rates. Public hospitals, on the other hand, prefer insured patients because they get some money for their treatment. This creates the problem of discriminatory treatment & pressure to enroll for insurance on spot. 
9. Information Asymmetry and Fraud: Both government and private schemes struggle with fraud and unethical practices. This includes excessive billing or unnecessary procedures by healthcare providers to maximize claim amounts, which, in turn, increases the overall cost of insurance for everyone. The NHA has recently recommended action against 3200 hospitals for fraudulent activities under PM-JAY.
10. Regulatory Capacity: While the Insurance Regulatory and Development Authority of India (IRDAI) is active, ensuring compliance across thousands of hospitals and hundreds of insurance products requires enormous regulatory bandwidth, especially in monitoring billing practices and claim settlement integrity.
11. Impact on States’ Budget: Although GFHIs target socio-economically backward sections, many States have extended coverage to non-poor populations. The inclusion of non-poor households has increased the utilisation & placed a greater strain on States’ budgets for e.g. in Haryana & WB, nearly 15% of their State health budgets are spent on GFHIs. This increased fiscal strain is also leading to delays in reimbursement to private providers.

What should be the Way forward?

1. Universal Health Coverage:
   • Expand government schemes like Ayushman Bharat to cover the uninsured population (~400 million), especially focusing on outpatient care and chronic illnesses.
   • Bridge the “Missing Middle” Gap: Encourage insurers to offer highly flexible, modular plans that allow the “missing middle” to buy specific coverage at a lower cost, with the option to add comprehensive coverage later.
   • Increase public investment in primary and preventive healthcare, integrating insurance with wellness and early intervention programs.
2. Affordability & Product Innovation:
   • Standardize insurance policies with transparent coverage and limits (e.g. Arogya Sanjeevani) to eliminate confusion and mis-selling.
   • Develop plans tailored for seniors, women, and low-income groups, including wellness-linked benefits and cashless OPD coverage.
3. Mandatory Health Claims Exchange (HCX) Use: The government must mandate the use of the HCX platform by all hospitals and insurers (public and private). This standardized digital exchange will drastically reduce claim processing time, minimize disputes, and reduce fraudulent billing by creating an audit trail.
4. Strengthened Regulatory Framework:
   • IRDAI reforms to speed claim settlements, mandate cashless anywhere facilities, protect consumer rights, and regulate premium hikes.
   • Introduce composite licenses allowing insurers to offer life and health insurance products seamlessly.
5. Increased Awareness & Literacy:
   • Run public campaigns focused on the importance of insurance, especially in rural/underserved regions.
   • Promote financial literacy, especially around claim processes, policy selection, and benefits.
6. Paperless and Aadhaar-Linked Claims: The goal should be for 100% cashless and paperless claim settlement for all enrolled patients, using the ABHA (Ayushman Bharat Health Account) ID for authentication and record access.

Conclusion:
Health insurance is definitely an important pillar towards achieving UHC (Universal Healthcare), however, to truly achieve the UHC, the focus should be on not only overcoming the limitations of the existing health insurance programmes but also on investing in basic public healthcare infrastructure to deliver universal, comprehensive care.

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