In India, the out-of-pocket health expenditure by households accounts for around 70 percent
of the total expenditure on health. Large out-of-pocket payments may reduce consumption
expenditure on other goods and services and push households into poverty. Recently, health
insurance has been considered as one of the possible instruments in reducing impoverishing
effects of large out-of-pocket health expenditure. In India, health insurance has limited
coverage and the present paper studies whether it has been effective so far. Literature
defines out-of-pocket health expenditure as catastrophic if its share in the household budget
is more than some arbitrary threshold level. In the present paper, we argue that for
households below poverty line any expenditure on health is catastrophic as they are unable to
attain the subsistence level of consumption. Thus, we take zero percent as a threshold level
to define catastrophic health expenditure and examine the impact of health insurance on
probability of incurring catastrophic health expenditure.