Health shocks household decisions and state interventions

Abstract

Health is probably the most essential component that defines an individual s well- being. Even wealth without good health is futile and expendable. While studying health as a discipline in economics has gained recognition only recently, the impor- tance of good health has been known for centuries. The theories and empirical find- ings of contemporary economics literature are in sync with such conventional wisdom. The economic theory now recognizes health, apart from education, as a key input for human capital formation (Becker, 2007). Further, empirical studies also provide evi- dence on the causal impact of health on income and economic growth (Acemoglu and Johnson, 2007; Lorentzen et al., 2008; Bleakley, 2010; Cutler et al., 2010; Cervellati and Sunde, 2011). However, despite sustained economic growth and advancements in medi- cal science and technology health outcomes remain poor in developing and under- developed countries (Deaton, 2007; WHO, 2015). Further, a significant proportion of people residing in these countries are financially unprotected against the risk of health shocks. Health shocks are the most frequent and idiosyncratic among all other types of income shocks. Health shocks impose a serious financial burden on households in the form of higher medical expenditures and forgone labor market earnings of the ill member. More importantly, neither is the incidence of an illness nor is the cost of medical care and forgone earnings associated with an illness known a pirori with cer- tainty. The economic costs associated with illness shocks often outweigh those asso- ciated with most other income shocks (Heltberg and Lund, 2009; Yilma et a1., 2014; Wagstaff and Lindelow, 2014). Due to the lack of health and income insurance in de- veloping countries, most of these costs are financed out-of-pocket, leaving households uninsured against illness shocks. The economic costs of idiosyncratic health shocks pose a threat to a household s economic well-being and welfare. In other words, health shocks may severely