# I. **INTRODUCTION**

Anecdotal evidence on the economic impacts of adverse health shocks abounds. An Egyptian woman in a recent global participatory poverty study known as _Voices of the Poor_ reported “We face a calamity when my husband gets ill. Our life comes to a halt until he recovers and goes back to work.” (Narayan, Patel et al. 2000). The same study recorded the case of a 26 year-old man in Lao Cai, Vietnam, who, as a result of the large health care costs necessitated by his daughter’s severe illness, moved from being the richest man in his community to being one of the poorest. Also recorded were the remarks of a Vietnamese woman from Tra Vinh who said “Poor people cannot improve their health status because they live day by day, and if they get sick they are in trouble because they have to borrow money and pay interest.” While there is no shortage of anecdotal evidence, firm empirical evidence on the economic consequences of health shocks is harder to come by. This paper builds on two recent papers (Dercon and Krishnan 2000; Gertler and Gruber 2002) to explore two related issues: how far household income and medical care spending responds to health shocks; and how far household consumption is protected against health shocks.

The extent to which household income responds to health shocks depends on a number of factors. One is the extent to which households rely on one or two members for their income. The income of an urban household with a single breadwinner may not be affected at all when household members other than the breadwinner falls sick, but is especially vulnerable when the breadwinner falls ill. A rural household with many household members—including children— contributing to the household’s income is less vulnerable when, say, the household head falls sick, and may even be able to reallocate labor time to compensate for lost income. Both types of household may see any losses in earned income associated with illness offset at least in part by increases in unearned income. This could involve payments to cover lost wages by a formal sickness insurance scheme. Or it might involve informal payments by relatives or friends in the form of extra remittances or gifts intended to help cover lost income and medical expenses. It is plausible that the size of any informal payments could depend on whether the household has access to other forms of assistance or insurance—a household that is already covered by formal sickness and health insurance schemes is unlikely to be considered especially needy by relatives and friends. Evidence on the differential impacts across different household types of health shocks on earned and unearned income is scant—this paper presents new evidence on the subject.

The degree to which medical care spending responds to health shocks is likely to depend largely on whether the household—or the affected member of the household—has formal health insurance, or is covered by a fee-waiver program. But even households with health insurance may see medical outlays rise in response to health shocks. An obvious reason is their coverage may be limited—they may not be covered for outpatient expenses or for drug costs, or there may be a ceiling on reimbursements. Less obviously, providers and patients alike may increase utilization once the patient is covered (more diagnostic tests, more expensive medication, etc.), so that a patient’s outlays following a health shock may be little different with and without