What happens to farmers in developed nations when they or their family members get sick? Typically, much of a farmer’s savings is tied up in illiquid assets (land, crops, fertilizer, etc.) and the farmer turns to the town money lender. Since there is less competition for loans in rural areas, the money lender can charge the farmer exorbitant interests rates. If the farmer’s crops would happen to fail, the farmer can be pushed into a debt cycle which is difficult to escape.
The Indian Economy Blog looks at the success of Yeshasvini (a self funding micro health insurance scheme). Yeshasvini wisely tried to avoid the perils of adverse selection by constructing membership as follows:
“The Yeshasvini Health Scheme was open to people who were together for a purpose. Be it as a co-operative society, a grameen bank or quite simply for a reason other than health. This criterion was of paramount importance for the success of the scheme, because opening the scheme to everybody would have resulted in only people with diseases becoming members. This in turn would make a self-funding scheme unviable.”
We can see that even in rural India, helping markets to work more efficiently–instead of replacing them with government run systems–can lead to superior outcomes.