Critical Illness Insurance to alleviate catastrophic health expenditures: new evidence from China

Abstract

Currently, a high percentage of China’s households face financial catastrophe as a direct result of excessive out-of-pocket (OOP) health expenditures. To alleviate this, China has set up the Critical Illness Insurance (CII) program since 2012. However, the current CII is still in an experimental phase and tested in 8 (out of 34) provinces, which has not been proved to be effective. This paper develops a health financing system for reducing catastrophic medical spending using a two-layer model for CII. This model partly compensates expenses exceeding the cap line of the Social Resident Basic Medical Insurance scheme to maintain the ratio of OOP expenses to total medical expenditure approximately at 20%. Adjustment coefficients based on individual net income across different regions are applied to increase fairness. The financial sustainability of the model is tested using a fund balance calculation. Finally, the two-layer model of the CII is empirically simulated with the latest provincial data from China Family Panel Studies. The results demonstrate that the model can effectively alleviate the incidence and severity of catastrophic health expenditures.

Appendix

(a) The calculation of $\varpi_{i}$

Suppose the deductible of the SRBMI is $De$; the compensation ratio of the SRBMI is $\left( {1 - \alpha } \right)$; the inpatient expenditure of the insured $i$ at time $j$ is $x_{ij}$; the individual cumulative annual medical expenditure is $x_{i}$; the OOP expense of the insured $i$ at time $j$ is $OOP_{ij}$; and the individual cumulative annual OOP expense of the insured $i$ is $OOP_{i}$. For the insured $i$ with individual cumulative annual medical expenditure exceeding the cost deductible of the CII, there is an $m_{i}$ satisfying $\sum\nolimits_{j = 1}^{{m_{i} - 1}} {x_{ij} < CD}$ and $\sum\nolimits_{j = 1}^{{m_{i} }} {x_{ij} \ge CD}$. For $m_{i}$ inpatient treatments, we introduce a two-valued variable $n_{ij}$, which shows whether the inpatient expenditure of the insured $i$ at time $j$$\left( {x_{ij} } \right)$ exceeds $De$; $n_{i}$ is the total number of times that the inpatient expenditure exceeds the $De$ of the insured $i$, $x_{ij}^{'}$ means that the OOP expense of the insured $i$ at time $j$ that $x_{ij}$ is lower than $De$, and $x_{j}^{'}$ is the sum of $x_{ij}^{'}$. That is, if $x_{ij} > De$, then $n_{ij} = 1$, $n_{i} = \sum {n_{ij} }$; if $x_{ij} \le De$, then $n_{ij} = 0$, $x_{ij}^{'} = x_{ij}$ and $x_{i}^{'} = \sum {x_{ij}^{'} }$. Therefore, we can get the OOP expenses before the compensation of the SRBMI, denoted as $\varpi_{i}$.

$$ \varpi_{i} = n_{i} De + x_{i}^{'} $$

(a1)

(b) Detailed information of $OOP_{a}$

When $CD \le x_{i} < TL_{1}$,

$$ OOP_{a} = \gamma_{i} \times \left[ {\varpi_{i} + \alpha \times \left( {CD - \varpi_{i} } \right) + \beta_{1} \times \left( {x_{i} - CD} \right)} \right] $$

(a2)

When $TL_{1} \le x_{i} \le TL_{2}$,

$$ OOP_{a} = \gamma_{i} \times \beta_{2} \times \left[ {\varpi_{i} + \alpha \times \left( {CD - \varpi_{i} } \right) + \beta_{1} \times \left( {TL_{1} - CD} \right) + x_{i} - TL_{1} } \right] $$

(a3)

When $x_{i} > TL_{2}$,

$$ OOP_{a} = \gamma_{i} \times \beta_{2} \times \left[ {\varpi_{i} + \alpha \times \left( {CD - \varpi_{i} } \right) + \beta_{1} \times \left( {TL_{1} - CD} \right) + TL_{2} - TL_{1} } \right] + \left( {x_{i} - TL_{2} } \right) $$

(a4)