**2. Concept of health insurance**

In the past, people would pay for their health care just as they would buy a shirt in the market. Thus, they would pay out-of-pocket (OOP) for their health care. This mode of financing health care is largely outmoded, but poverty, poor health care systems, and policy compel many countries to finance health care by OOP. Financing health care through these direct OOP can impoverish countless households, especially in LMICs. Health insurance can solve the problem of OOP in most poverty endemic countries.

Health insurance is a system of financing health care through resource mobilization and risk pooling where risk-averse individuals prepay some amount of money into a pool for future health care benefits. Using the principle of large numbers, a third party manages the pool and purchases health care for members (the insured)

### *Health Insurance for Economically Disadvantaged People in LMICs: What are the Best Options? DOI: http://dx.doi.org/10.5772/intechopen.105679*

in the case of illness. For the pool of funds to grow substantially to serve the interests of members, there must be large numbers of individuals collectively contributing equitable amount of money into the financial resource pool and sharing their financial risk to enjoy the collective financial protection.

To sustain the financial pool, there must be cross-subsidization across all the members contributing to the health insurance pool. In the spirit of fairness, there must be established policy measures to ensure that the rich pays more and the poor pays less, each pays according to their abilities (proportion of their income) into the health insurance fund; also, the healthy pays for the sick and economically healthy people pay for children and elderly. It is important to, however, check adverse selection in the risk and resource pooling process.

Adverse selection in health insurance is a situation where majority of health risk persons, people with preexisting health conditions, vulnerable population such as children, aged persons, and women are those mostly registered in the health insurance scheme, while healthy people enroll less in the insurance scheme. When this adverse selection of members occurs in a health insurance scheme, the likelihood of it collapsing is very high. The reason is that utilization of health care tends to increase, and claims cost also increases above revenue, unless there are huge subsidies from the government or philanthropic organizations to supplement the revenue stream of the organization to offset the catastrophic health care expenditures.

In addition to adverse selection, two forms of moral hazards are very common in health insurance that are worth mentioning under concepts of health insurance: consumer and provider moral hazard.

Consumer moral hazard means that the individual alters his or her behavior inappropriately to benefit from the health insurance scheme. For example, the individual could impersonate with someone else's insurance card to obtain health care. When the hospital authorities are not very vigilant, the insurance member could also intentionally seek health care unnecessarily just because the person is insured and has not falling ill or gotten an accident to make a health claim.

However, in developing countries, and selected advanced countries, like Canada and United Kingdom where there is waiting time to see a physician, especially, the medical specialists which take very long time, no rational individual would want to wait in the long line for no apparent sickness or health condition, just because of being insured.

Provider moral hazards emanate from the health care organizations or health professional to unduly benefit from the health insurance of patients. Providers alter their behaviors to "cheat" the health insurance system to make supernormal profits. There is a huge perception that the health insurance fraud in advanced countries is an albatross in the health care financing system. Provider moral hazards are facilitated by the information asymmetry that health care providers or health care professionals wield. They can use the information asymmetry to manipulate the health insurance system to make additional money. Information asymmetry arises because health care professionals are the vital repository of knowledge of the health condition and treatment regime of the patients and can therefore manipulate the information to their (providers') advantage. For instance, if the health specialist decided to admit a patient on a health condition for 10 days instead of 5 days, the patient, though has the right to reject the number of days of the hospitalizations, does so at his or her own peril.
