Protecting households from high out-of-pocket (OOP) payments for health care is an important health system goal. High OOP payments can push households into poverty and make them vulnerable to catastrophic health expenditures. This study, based in India, aims to: (a) estimate OOP payments for health and related impoverishment across economic groups; (b) decompose OOP payments and relate the contribution of their components to impoverishment; and (c) examine how well recently introduced national insurance schemes meant for the poor are able to provide financial protection. The analysis of nationally representative data from India shows that 3.5% of the population fall below the poverty line and 5% households suffer catastrophic health expenditures. The poverty deepening impact of OOP payments was at a maximum in people below the poverty line in comparison with those above (Rs. 10.45 vs. Rs. 1.50, respectively). Medicines constitute the main share (72%) of total OOP payments. This share reaches 82% for outpatient care, compared with 42% for inpatient care. Removing OOP payments for inpatient care leads to a negligible fall in the poverty headcount ratio and poverty gap. However, if OOP payments for either medicines or outpatient care are removed then only 0.5% people fall into poverty due to spending on health. These findings suggest that insurance schemes which cover only hospital expenses, like those being rolled out nationally in India, will fail to adequately protect the poor against impoverishment due to spending on health. Further, issues related to identifying the poor and their targeting also constrain the scheme's impact. A broader coverage of benefits, to include medicines and outpatient care for the poor and near poor (i.e. those just above the poverty line), is necessary to achieve significant protection from impoverishment.