Principal investigator: Viviane Pires Ribeiro
Paper Title: Insuring Consumption Against Illness
Authors: Paul Gertler and Jonathan Gruber
Location of the Intervention: Indonesia
Sample Size: 3.933 households
Main theme: Health Insurance
Main Variable of Interest: Health insurance
Type of InterventionGovernment measures to mitigate the impacts of serious illnesses on household consumption.
Methodology: Fixed Effects Templates
It consists of two islands: one east of Bali; and East Kalimantan (KalTim), located off the east coast of Borneo. Together, they represent approximately six million inhabitants. KalTim has the third highest income. for capita among all 27 provinces, while NB is in twenty-second place.
Methodology Details
The sample used by Gertler and Gruber (2002) collected data for the period of 1991 and 1993, allowing them to examine changes in health, income, and consumption over a two-year period. The data are from a stratified random sample of households, consisting of approximately 20 households per village (216 villages). They were collected for each household at the same point in the year, so that the effects of seasonality were conditioned in the fixed effects model. The response rate in the first round of the survey was relatively higher at 91%, and the attrition between the first and second rounds was low, around 7%.
The sample is a panel of 3.933 households, comprising all households that participated in the survey in both rounds, whose head of household from the first round was also in the sample for the second round, and whose data does not... proxy and comprehensive on health measures. To this end, the IRMS questionnaire was used, which was developed based on a detailed list: labor supply, consumption, and existing health survey modules, and was augmented where found to be incomplete. The research team used focus groups and extensive pilot testing to ensure that the questions fit the cultural context. To minimize measurement error, all adults in the household were interviewed directly, rather than interviewing one individual and using surrogate responses for the rest.
The authors specified and implemented a reduced-form model of households' abilities to secure consumption against illness. The model is a fixed-effects specification and, as such, controls for unobserved heterogeneity. In particular, the first difference eliminated the correlation of omitted unobserved individual characteristics (such as health preferences and resources) that confound the identification of the effect of illness on labor market outcomes. It also controlled for an important source of spurious correlation, shocks to the local community economy, such as weather, which affect both changes in permanent income and changes in health, including a set of community fixed effects.
Results
Using reliable and valid measures of health problems that distinguish various degrees of severity, Gertler and Gruber (2002) identified that Indonesian families are unable to insure the economic costs of serious illnesses. It is estimated that 35% of these costs are not covered by other sources available to these families. It was also observed that the more severe the illness, the less able families are to afford health insurance. However, families can fully insure the economic costs of illnesses that do not affect physical functioning. Furthermore, they can insure 71% of the costs resulting from illnesses that moderately limit an individual's physical capacity, but only 38% of the costs of illnesses that severely limit physical capacity.
The analysis indicates that illness is associated with a 0,84 percent drop in consumption from baseline. This is a non-trivial effect, given the low frequency of serious illnesses that cause significant health limitations. Furthermore, this underestimates the total cost of welfare loss associated with illness for at least two reasons. First, there are additional welfare costs arising from the variability of uninsured consumption, in addition to the reduced level of consumption. Second, there are costs for those resources used to smooth consumption when family members become ill.
Therefore, it was found that families' ability to obtain insurance drops drastically with the severity of the illness shock. That is, families are able to secure less than 40% of the income loss due to illnesses associated with a very severe loss of physical capacity.
Lessons in Public Policy
Although the results obtained by the study conducted by Gertler and Gruber (2002) indicate that families are able to cover the costs of frequent and less severe illnesses, they also suggest that families are unable to cover the costs of rare and severe illnesses. This indicates that there may be a significant welfare cost to increasing user rates in public hospitals in order to transfer subsidies to primary and preventive care (which is affordable).
Therefore, governments considering raising hospital user rates should consider how to secure healthcare costs for serious illnesses, such as by limiting hospital admission rates or planning prepayment schemes in conjunction with subsidy reductions.
The authors cite previous studies suggesting another form of social insurance in developing countries: financing public healthcare through payroll taxes and allowing beneficiaries to purchase healthcare from private providers. In other words, the argument is that low-income countries have limited taxing capabilities, thus severely restricting resources available for social insurance. This results in a trade-off between coverage that only covers serious illnesses, with high but unlimited coverage, and coverage that covers all expenses from the first dollar onwards, but with a low ceiling on total covered expenses. Other studies highlight that many low-income countries prefer the latter strategy, providing minimum benefits for all illnesses rather than full coverage for rare and high-cost diseases.
According to Gertler and Gruber (2002), this choice stems from concerns that low-income groups may not be able to "pay" the deductible and therefore would not benefit from the plan. However, if families can afford to cover minor health shocks, then benefits limited to a first dollar contribute little to increasing insurance costs.
Regarding formal disability insurance, the authors suggest that there are gains from introducing this plan in countries like Indonesia. This is because, in Indonesia and (possibly) in many other developing countries, the majority of the cost of illness is associated with loss of income and not healthcare expenses. However, in developed countries, publicly funded disability insurance programs can be quite costly in terms of administrative costs, moral hazard, and marginal cost.
References
GERTLER, Paul; GRUBER, Jonathan. Insuring consumption against illness. American Economic Review, v. 92, no. 1, p. 51-70, 2002.
