Insurance of Household Risks and the Rebalancing of the Chinese Economy: Health Insurance, Health Expenses and Household Savings

This paper studies the effects of a public insurance system, the New Cooperative Medical Scheme (NCMS) on household savings in rural China. We develop a theoretical model in which we explain the impact of health insurance on savings through the impact of health insurance on out-of-pocket (OOP) health expense given the household level of wealth and seriousness of illness. We test the model empirically using data from the China Health and Nutrition Survey. We run endogenous and exogenous quantile regressions to evaluate the effects of NCMS participation on the distributions of household savings and OOP health expense. The impact of NCMS varies with the seriousness of illness. NCMS induces an increase in OOP health expense for mild illness and inversely, a decrease in health payments for more serious illnesses. NCMS also leads to a higher incidence of catastrophic healthcare spending. The impact of NCMS, given a certain state of illness, also varies with the household level of wealth. Poor households engage in health expense for both mild and serious illnesses. As NCMS has opposite effects on the OOP expense for these two kinds of illness, we observe no effect on poor households' precautionary savings. Since the decrease in OOP health expense for mild illness is larger for less poor households, NCMS induces a decrease in their savings. For the most affluent households, the higher decrease in OOP spending on most moderate illness is dominated by a sharp increase in catastrophic expense, causing an increase in savings. In order to significantly reduce household savings and enhance household consumption, NCMS has to offer better coverage against both serious and catastrophic health risks.