Incomplete consumption insurance against health shocks: costs and welfare implications

Available from: 
October 2013
Paper author(s): 
Ana Sofía León Lince (Universidad Diego Portales)
Education - Health
Fiscal Policy - Public and Welfare Economics

Given that financial protection in health is one of the objectives of the recent health system reforms in many developing countries, understanding clearly the mechanisms that lie behind the financial vulnerability associated with health shocks is key for the success of past and forthcoming reforms. Using Mexican longitudinal data, I study the effect of breadwinners’ health shocks on household consumption, measuring health shocks through changes in the capacity to perform Activities of Daily Living. I find that health shocks to households’ breadwinners are associated with significant long-lasting decreases in non-medical per capita consumption, but health shocks to other household members have no such effects. When consumption depends on labor income, the economic cost associated with a health shock may lie less with direct out-of-pocket medical expenditures than with the diminished capacity to work. Therefore, providing health insurance to the previously uninsured sector of the population could potentially increase social welfare because of its consumption smoothing properties, although it would not necessarily provide full consumption insurance against health shocks. Finally, I use a standardized expected utility model, to compute the risk premia Mexican households would be willing to pay to reduce, either partially or entirely, households’ risk exposure to health shocks.


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Research section: 
Lacea 2013 annual meeting
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