Equity is a major policy objective of health care reforms across nations. Publicly Financed Health Insurance (PFHI) schemes are one major health care reform that have been adopted across developing countries to address inequity. Existing literature on the effect of PFHIs focuses on out-of-pocket expenditure and utilization of health services, while the effect of PFHIs on equity in health service use remains understudied, particularly in the Indian context. This study addresses this knowledge gap. In 2008 India launched a PFHI scheme with an aim to achieve horizontal equity, that is the equal treatment for equal needs, in the utilization of health services. Using data from the National Sample Survey Organization (NSSO), we analyze the extent of inequity in the utilization of inpatient services before (2004) and after (2014) the implementation of the PFHI. The annual hospitalization rate increased from 2.4 percent in 2004 to 4.4 percent in 2014 and the increase is higher for rural population. The proportion of population covered by any health insurance scheme increased from 0.5 percent to 15.3 percent post-PFHI implementation. The study finds that PFHIs were associated with reduced inequalities in inpatient service use, but the extent of reduction varied across states and across urban/rural areas. Our inter-state analysis shows that the States with a higher concentration of PFHIs among richer quintiles, a possible leakage and exclusion errors, have failed to ensure the needed access for their poor population. This failure reflects in their higher levels of income-based inequity in inpatient service use. This study has implications for the implementers of social security programs adopting targeted approach. There is a need for better strategies for the identification of beneficiaries and ensuring that they receive scheme benefits to have intended welfare effects.