Study Overview
One of the most sizable and least predictable shocks to economic opportunities in developing countries is major illness. We investigate the extent to which families are able to insure consumption against major illness using a unique panel data set from Indonesia that combines excellent measures of health status with consumption information. We find that there are significant economic costs associated with major illness, and that there is very imperfect insurance of consumption over illness episodes. These estimates suggest that public disability insurance or subsidies for medical care may improve welfare by providing consumption insurance.
Study Results
Using reliable and valid measures of ill-health that distinguish varying degrees of severity, we find that Indonesian households are not able to fully insure consumption against the economic costs of illness. We find that the more severe the illness, the less households are able to insure. Households are able to smooth 70 percent of the costs resulting from illnesses that moderately limit an individual’s ability to function physically, but only 27 percent of the costs from illnesses that severely limit physical functioning.