Health Shocks, Health Insurance, Household Welfare & Informal Coping Mechanisms: Evidence from Nigeria

Health shocks are a source of financial risk especially in low and middle-income countries. This paper examines the effects of health insurance on household welfare during health shocks and the informal strategies used to cope with these health shocks. We employed a fixed-effect regression modelling approach which exploits household variation in illness occurrence and health insurance status over 55 weeks in a panel dataset sourced from weekly financial diaries of 121 households in central Nigeria.

Health shocks are associated with increased out-of-pocket health expenditures, but this increase is 42 percent lower when insured during a health shock compared to not being insured. Somewhat surprisingly, we find that household consumption increases in the week of a health shock regardless of whether these health shocks are covered by health insurance.

The effect of health shocks on household consumption may be influenced by how well households are able to deploy informal coping strategies in response to health shocks. We find that net loans increase by 31 percent for households with uninsured health shocks and fall by 26 percent for households with insured health shocks compared to households with no health shocks. Net savings also reduce by 42 percent for households with uninsured severe health shocks compared to households with no health shocks.

Health insurance therefore seems to play an important role in helping protect insured households’ financial risk during a health shock, while uninsured households appear to rely on potentially costly informal coping strategies in order to smooth consumption.