Does integrating pharmaceutical coverage into publicly financed health insurance reduce out-of-pocket spending?...

Publicly financed health insurance expansions in India have often increased inpatient utilisation without commensurate reductions in out-of-pocket (OOP) spending. Whether integrating benefits to cover chronic-disease medicines improves financial protection has received little empirical attention.

This study examines whether the Karunya Arogya Suraksha Padhathi (KASP), Kerala's implementation of Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana (AB PM-JAY), which consolidated multiple state and national schemes under a unified purchaser and expanded package-based cashless coverage for secondary, tertiary, and eligible day-care services from April 2019, reduced household OOP health expenditure.

We use household panel data from the Consumer Pyramids Household Survey (CPHS) covering April 2017 to February 2020, comprising 58,171 household interview observations across Kerala, Tamil Nadu, and Karnataka, and apply a difference-in-differences (DiD) design. Outcomes include net OOP health spending and its components.

KASP reduced net OOP health spending by approximately 31.7% in specifications allowing Kerala-specific trends. The decline was concentrated in medicine spending, while hospitalisation rates were statistically unchanged. Total health spending declined in baseline two-way fixed-effects (TWFE) models but was statistically indistinguishable from zero in trend-adjusted specifications; the net OOP reduction remained robust. Effects were larger among poorer households and those with chronic conditions, and smaller in rural areas, consistent with limited access to empanelled hospitals. Results are robust to event-study diagnostics, alternative comparator pools, and a timing placebo based on Tamil Nadu's December 2018 inpatient-cap expansion.

Benefit expansion covering medicine costs can improve financial protection by reducing point-of-care payments, even without reducing total costs in the short run. The findings suggest that aligning public insurance benefit packages with households' pharmaceutical spending patterns, particularly among those managing chronic conditions, may offer a more direct route to financial protection than hospitalisation-focused expansion alone.