Insuring against Health Shocks: Health Insurance, Consumption Smoothing and Household Choices

This paper presents new evidence on the role of public health insurance in mitigating the adverse outcomes associated with health shocks. I exploit a natural experiment from the rollout of universal health insurance in rural China. Using longitudinal data spanning the period in question, I find that health insurance helps households maintain investment in children’s human capital and agricultural activities during negative health shocks. Given that households were able to completely smooth consumption against health shocks before the reform, the evidence suggests that the benefit of health insurance could come from reducing the use of costly smoothing mechanisms. JEL: D1, O1, I1