<p>The beneficiaries of public health insurance are identified based on socioeconomic criteria, with a maximum cap on coverage for secondary and tertiary healthcare services. However, this approach overlooks the severity of illnesses, leading to high out-of-pocket expenses for beneficiaries with severe diseases and prolonged hospital stays. This paper examines the adequacy and efficiency of health insurance in covering hospitalization expenses across three groups: (i) low severity of illnesses, (ii) moderate severity of illnesses, and (iii) high severity of illnesses. The study utilizes data from the ‘Longitudinal Aging Study in India (LASI)’ for 2020–21. A finite mixture model approach is used to examine the effectiveness of health insurance in reducing hospitalization expenses across groups of low to high severity of illness. The results indicate that health insurance significantly reduces hospitalization expenses only in the group with low severity of illness. Furthermore, the concentration curve reveals inequality in health insurance coverage across all groups, although this inequality decreases from lower to higher severity of illness.</p>