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Final Report Summary - HEALTHEVENT (Financial Protection against Health Risks - Evidence from an Emerging Country with Universal Coverage and Methodological Considerations)

Due to inadequate or altogether lacking formal social protection, millions of people in low and middle income countries face severe financial risks when struck by illness or injury. The past decade has seen a global push towards Universal Health Coverage, as more and more countries in the develo ping world introduced medical benefit schemes for hitherto uninsured, often poor populations. Benefit package limitations, constrained health infrastructures and human resources, as well as organizational deficiencies, however, often undermine the effectiveness of the newly won coverage. As a result, severe illness might still expose households to catastrophic out-of-pocket medical spending and/or force the ill to forgo adequate medical treatment for financial reasons.
Formal social protection against the second major source of financial illness risk – income loss due to illness-related inability to work – remains all but absent in the developing world to this day, as there is neither paid sick leave nor disability income insurance for informal sector workers who typically constitute the large majority of low and middle income country workforces.
In the absence of formal social security, households can dispatch a number self-insurance strategies to cope with the financial burden of illness, including dissaving, borrowing, and transfers from family and friends. However, such coping may not, or only in the short run, be sufficient to protect food and other essential consumption. Moreover, some coping strategies like the selling of productive assets and high interest borrowing which effectively protect consumption in the short –run might be severely detrimental to household welfare in the longer term.
HEALTHEVENT informs stakeholders – policymakers, civil society, and academics – in the global and national debates on social protection policies with four empirical studies which quantify exposure to financial illness risks and coping strategies of informal sector households in three low and middle income countries with different degrees of health coverage. HEALTHEVENT also makes a methodological contribution by using panel data estimation techniques that rule out biases most previous studies on the economic consequences of illness in low and middle income countries have left unaddressed.
The first study (“Economic impact of illness with health insurance but without income insurance”, Neelsen et al., 2015) examines economic vulnerability to illness among beneficiaries of Thailand’s Universal Coverage Scheme. First introduced in 2001, the scheme is widely cited as the leading example of the feasibility of extending comprehensive health care coverage to vulnerable population groups within a tight budget constraint. Sickness-related earnings loss, by comparison, remains uninsured among the scheme’s target group of informal sector households. We find that severe illness that strikes an initially healthy worker reduces the probability of remaining in employment by 18 percentage points and precipitates a reduction in household earnings of almost one third. Even with the near comprehensive nominal health care entitlement, severe illness raises out-of-pocket medical expenses by around two thirds and increases the probability that medical spending absorbs more than a tenth of the household budget by nine points. Despite the rise in medical expenses and fall in earnings, on average, households appear able to largely protect spending on goods other than medical care by drawing on informal transfers, cutting back on saving, and borrowing. These risk coping strategies help fill gaps that are not nominally or effectively covered by formal insurance. However, we cannot rule out that severe illness causes non-medical expenditure to be cut by up to 13% and informal mechanisms will be even less effective in coping with risks of long-term illness.
The second study (“Are health shocks to earners different? The economic consequences of disability in rural India”, Neelsen et al., unpublished manuscript) investigates if rural Indian households with limited health coverage and no insurance of illness-related earnings loss have a different economic response to illness depending on whether it disables an earning member. This research sheds light on the potential welfare gain from extending disability income insurance to informal sector populations. Our analysis uses a multiyear panel of households enrolled in women self-help groups which encourage saving and give women access to financial and entrepreneurial training. Perhaps contrary to intuition, our results indicate that informal insurance mechanisms fully shield households from additional adverse impacts if an earner suffer a disabling illness: While we find that such illnesses reduce the labor market participation of those affected by more than 7 percentage points, there is little evidence for differential impacts on household out-of-pocket medical spending, overall household labor supply, risk coping strategies such as borrowing and productive asset sales, or non-medical consumption compared to illnesses that disable non-earning members or illness that strike earners but do not limit their productive activities.
The third and fourth studies focus on economic vulnerability to illness in Peru, a country which has stepwise increased health coverage of its poor population over the past decade. “Coping with health shocks in the short- and mid-term: evidence from a middle-income country with limited social protection” (Neelsen, unpublished manuscript) is one of the first studies to distinguish short- from longer-term economics impacts of illness. Using panel data from Peru’s National Household Survey, I find that informal sector households experience losses in labour income of up to 18 percent and increases in out-of-pocket medical spending of over 70 percent within the year that a member suffers a grave illness or injury. Informal coping in the form or transfers from relatives and friends enables short-run consumption smoothing. 1-2 years after a grave illness first occurred, I find its short-run impacts on labour income and out-of-pocket medical spending to have largely abated, while informal transfers remain somewhat elevated, helping to avoid consumption cuts also in the mid-run. In “Progressive universalism? The impact of targeted coverage on healthcare access and expenditures in Peru” (Neelsen & O’Donnell, 2016), we examine if the extension of basic, tax-financed health coverage to poor Peruvians can reduce their financial risk from out-of-pocket healthcare spending, and their probability of forgoing medical treatment for financial reasons. Using cross-sectional data from the Peruvian National Household Survey, we find that the newly won coverage has positive effects on receipt of ambulatory care and medication. The likelihood of being unable to afford treatment falls by more than a quarter. Consistent with the shallow cover offered, there is no impact on use of inpatient care. Mean out-of-pocket medical spending is unaffected but spending is reduced by up to one quarter at some points of the distribution. Among healthcare users, spending is reduced across much of the distribution and in relative terms falls most at lower quantiles, which is consistent with limited nominal and effective coverage of expensive treatments.
The sum of this research suggests that recent efforts to increase health coverage in low and middle income countries have reduced financial access barriers to healthcare without eliminating financial risk from out-of-pocket medical expenditures. Moreover, our findings show that informal sector households are able to self-insure consumption against illness-related income loss at least in the short-run. The finding that informal coping strategies might provide better insurance against financial illness risks than previously thought, however, does not amount to an argument against a further extension of formal social protection in the developing world. It is likely that reductions in essential consumption are only avoided because people forgo care with prohibitively prices – an issue that will be exacerbated in light of the growing prevalence of chronic conditions which require continuous and often expensive treatment. Furthermore, the effectiveness of self-insuring illness-related income loss is likely be limited to cases were illness strikes workers in low-skilled occupations. For this reason, absent formal social protection, it might be efficient for households reduce human capital investment which in turn would contribute to a perpetuation of poverty cycles.

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