1 WPS3740

# Health Shocks in China: Are the Poor and Uninsured Less Protected?

## by

## Magnus Lindelow and Adam Wagstaff

The World Bank, Washington DC, USA

### **Abstract**

Health shocks have been shown to have important economic consequences in developed countries. Less is known about how health shocks impact on income, consumption, labor market outcomes, and medical expenditures in middle- and low-income countries. This paper explores these issues in China. In addition to providing new evidence on the general impact of health shocks, we also extend previous work by assessing the extent of risk protection afforded by formal health insurance, and by examining differences in the impact of health shocks between the rich and poor. We find that health shocks are associated with a substantial and significant reduction in income and labor supply. There are indications that the impact on income is less important for the insured, possibly because health insurance coverage is also associated with limited sickness insurance, but the effect is not significant. We also find evidence that negative health shocks are associated with an increase in unearned income for the poor but not the non-poor. This effect is however not strong enough to offset the impact on overall income. The loss in income is a consequence of a reduction in labor supply for the head of household, and we do not find evidence that other household members compensate by increasing their labor supply. Finally, as expected, negative health shocks are associated with a significant increase in out-of-pocket health care expenditures. More surprisingly, there is some evidence that the increase is greater for the insured than the uninsured. The findings suggest that households are exposed to considerable health-related shocks to disposable income, both through loss of income and health expenditures, and that health insurance offers very limited protection.

**Corresponding author and contact details:** Magnus Lindelow, World Bank, 1818 H Street NW, Washington, D.C. 20433, USA.  Tel. (202) 458-0125. Email: <u>mlindelow@worldbank.org</u>

**Keywords:** Health insurance; risk; China.

World Bank Policy Research Working Paper 3740, October 2005 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org.

**Acknowledgements:** Our thanks to the Carolina Population Center at the University of North Carolina at Chapel Hill, the National Institute of Nutrition and Food Safety, and the Chinese Center for Disease Control and Prevention for making the China Health and Nutrition Survey available. Agbessi Amouzou helped preparing the data. We are grateful to Ren Mu for providing us with disaggregated income data.