A woman sells vegetables at a market six days a week. Her income is real but irregular: good in the harvest months, thin in the rains, zero in the week her child is sick. A health insurance officer arrives with a form. The premium is modest. It is due every year, in a lump sum, at a registration office in town, and it pays out only at accredited facilities, some of which she has never visited.
She does the maths that any of us would do. She is healthy this year. She pays school fees instead.
That scene, repeated across millions of households, is why so many contributory health insurance schemes stall at the edge of the formal economy. The International Labour Organization estimated in 2018 that about two billion people, 61% of the world’s employed population, work informally. For most low- and middle-income countries, informal workers are not a niche to be reached by a special product. They are the majority of the workforce.
The standard policy response is to design better insurance for them: lower premiums, flexible payment schedules, mobile money, group enrolment through cooperatives. All useful. My argument is that the frame is wrong. The problem is not that informal workers need better-designed premiums. It is that premiums are the wrong way to finance coverage for people whose income the state cannot see.
Voluntary schemes select the sick
Insurance works by pooling healthy and sick people together. Voluntary enrolment breaks that. The people most likely to sign up and renew are those who expect to use care: the chronically ill, the elderly, households with a pregnancy on the way. The healthy drop out, the pool gets sicker, costs rise, and premiums have to rise with them. Economists call this adverse selection. Health ministries experience it as schemes that never get past a fraction of their target population.
Formal-sector insurance avoids the problem because enrolment is automatic. Contributions come off a payslip, and nobody chooses. For informal workers there is no payslip, so enrolment becomes a choice, and choice brings selection.
This is not a marketing failure that better outreach can fix. It is a structural feature of asking people with irregular incomes and no employer to opt in, every year, to a product whose benefits they may not use for a while.
Look at who the “successful” schemes actually charge
The schemes often held up as models for covering informal workers mostly do not rely on those workers’ premiums.
Ghana’s National Health Insurance Scheme, launched in the mid-2000s, does charge premiums to informal-sector members. But its funding draws heavily on a national health insurance levy and on a 2.5% deduction from formal workers’ social security contributions. And it exempts large groups entirely: children under 18, people over 70, pregnant women and the indigent. In practice, the scheme’s reach depends on those exemptions and the levy far more than on collecting premiums from traders and farmers.
India’s Pradhan Mantri Jan Arogya Yojana, launched in September 2018, goes further. It offers eligible poor households hospital cover of up to ₹5 lakh per family per year, with no premium for the household. Eligibility is determined by the state, using deprivation data, not by whether someone chose to enrol. The government pays.
Thailand, which reached universal coverage in the early 2000s, did it by creating a tax-financed scheme for everyone not covered by formal-sector or civil servant schemes. Informal workers were covered because they were residents, not because they paid.
The common thread is that these countries stopped trying to collect premiums from people they could not tax, and funded their coverage from general revenue or broad levies instead.
The trade-off that makes ministries hesitate
If tax financing works better, why do so many governments still design contributory schemes for informal workers? Because the alternative has real costs.
Tax-funded coverage has to be paid for up front from the budget, in competition with everything else. A contributory scheme looks, on paper, as if it will partly fund itself. It also gives ministries of finance comfort that beneficiaries have “skin in the game.”
There is also the problem of the missing middle. Schemes targeted at the poorest, like India’s, leave out informal workers who are too well-off to qualify but too irregularly paid to buy private insurance. Extending tax-funded cover to them is expensive. Leaving them with voluntary premiums means leaving many of them uncovered.
That is the real decision: not whether to design a clever premium, but whether to fund coverage for the informal middle from general taxation, and accept the budget cost of doing it.
The mechanism: collecting small premiums is expensive
There is a practical problem beneath the economics. Collecting premiums from informal workers costs money, and the cost can eat up much of what is collected.
A payroll deduction is almost free to administer. The employer does the work, and the money moves electronically. Collecting a premium from a market trader requires someone to identify her, register her, verify her income category if premiums vary by income, collect the money, issue a card and chase her for renewal next year. Every step needs staff, offices and systems. Mobile money reduces some of those costs, but not the costs of identification, verification and renewal.
When premiums are set low to keep them affordable, the administrative cost per member can approach or even exceed the premium itself. The scheme then spends public money to collect small amounts of private money, while still failing to enrol most of its target population. It would often be cheaper to fund those members directly from tax revenue and skip the collection altogether.
Renewal compounds the problem. Many schemes see members enrol, use services and then fail to renew, either because they cannot pay when the renewal falls due or because they did not use care that year and see no point. Coverage becomes a revolving door. At any given moment, a large share of people who have ever enrolled are not active members.
A scenario: the enrolment curve
Picture a new contributory scheme launched for informal workers in a lower-middle-income country. In the first year, with an energetic campaign, enrolment rises quickly. The people who sign up first are those with an immediate reason: a pregnancy, a chronic illness, an elderly parent.
Claims per member are high, because the pool is sicker than the population. The scheme’s actuaries recommend raising premiums or cutting benefits. The ministry, under pressure to keep the scheme affordable, holds premiums but delays payments to providers. Hospitals respond by asking members to pay for some items informally.
In the second year, members who had to pay out of pocket despite having a card do not renew. Healthy households, hearing that the card does not really protect you, do not join. Enrolment plateaus at a fraction of the target. The ministry commissions a study on “barriers to enrolment” and considers a new awareness campaign.
The barrier, though, is the design. A voluntary scheme with a sick pool, underfunded benefits and unreliable provider payment will look exactly like this no matter how good the campaign is.
The strongest counterargument
The case for contributions deserves a fair hearing. It rests on three points.
First, revenue. In many low-income countries, tax revenue is low relative to the economy, and governments cannot simply fund universal coverage from general taxation. Contributions, even small ones, add money that would not otherwise exist.
Second, legitimacy. People who contribute may feel a stronger sense of entitlement and be more willing to demand good service. Schemes financed by contributions may be more politically durable because members see them as theirs, not as charity.
Third, fairness to formal workers. If formal-sector workers pay payroll contributions and informal workers get the same coverage free, formal workers may feel they are paying twice, and the political coalition for the scheme may fray.
These arguments partly hold. Revenue constraints are real, and in the poorest countries tax financing alone cannot fund a generous benefit package. Legitimacy matters. But the evidence from schemes that have tried voluntary contributions at scale suggests the revenue they raise from informal workers is modest and the cost in lost coverage is high. The legitimacy argument can be met in other ways, such as clear entitlements and public reporting. And the fairness concern can be addressed by making formal-sector contributions buy something visibly additional, rather than by excluding informal workers.
Second-order effects
How coverage is financed changes how people work.
The economist Santiago Levy argued, in the context of Mexico, that giving informal workers free social benefits while charging formal workers contributions can encourage informality: if you can get health coverage without a formal job, one reason to formalise disappears. The size of that effect is debated, but the concern is serious. The answer is not to deny coverage to informal workers. It is to separate health coverage from employment status altogether, so that nobody’s health coverage depends on whether their job is formal.
Financing also shapes provider behaviour. When a scheme is underfunded and pays providers late, facilities discriminate against its members. That is not a separate problem from enrolment. It is one of its causes.
And financing shapes data. Tax-financed, residence-based coverage requires a population register or a reliable identification system. Many countries are building those systems for other reasons. Linking health entitlement to them can cut costs and improve coverage at the same time, but it raises questions about privacy and exclusion for people without documents.
What this means for each actor
- For health ministries: stop measuring success by the number of cards issued. Measure active coverage and whether members actually receive care without paying.
- For finance ministries: compare the net revenue from informal-sector premiums with what it costs to collect them. The answer may make tax financing look cheaper than it seemed.
- For funders: avoid backing voluntary enrolment schemes as a route to universal coverage for informal workers without a credible plan to subsidise or automate enrolment.
- For providers: a scheme that pays late will not be trusted by members, no matter how it is marketed. Timely payment is the most powerful enrolment tool there is.
What to watch next
Watch how countries extending coverage to informal workers handle the missing middle, and whether they choose subsidised automatic enrolment or voluntary premiums. Watch whether digital identification is used to widen entitlement or to add new conditions. And watch the gap between enrolment figures and effective coverage, which is the most honest measure of whether a scheme is working.
What a better design looks like
- Make entitlement automatic. Coverage should follow residency or citizenship, not an annual decision to buy.
- Fund the base from broad revenue. VAT, earmarked levies or general taxation reach informal workers through consumption, which they already pay.
- Keep contributions optional and top-up. If informal workers want extra benefits, let them pay for extras, not for entry.
- Measure effective coverage. An insurance card is not care. Track whether members actually get treatment without paying at the door.
The instinct to make every beneficiary contribute is understandable. It feels fair and fiscally prudent. But for informal workers, a premium is not a contribution. It is a filter, and it filters out exactly the healthy, low-income people a risk pool needs most.
Has any contributory scheme in your country succeeded in enrolling a majority of informal workers voluntarily? What made it work?
