Health Insurance and Consumption- Evidence from China’s New Cooperative Medical Scheme.doc

Health Insurance and Consumption: Evidence from China’s New Cooperative Medical Scheme Chong-En Bai Binzhen Wu* Tsinghua University Abstract The precautionary saving motive is a popular explanation for the Chinese Saving Puzzle, but few empirical studies quantify the importance of the precautionary savings in China. We exploit the quasi-natural experiment provided by the introduction of a health insurance program in rural China to examine how the insurance coverage affects household consumption. The results show that the health insurance coverage on average stimulates non-healthcare related consumption by more than 5 percent. The effect exists even for households that have no health-care expenditure. In addition, the effect is stronger for poorer households and households with worse self-reported health status, who both have higher risk of relatively large health expenditure. We also find that the insurance effect varies with households’ experience with the program. Particularly, the effect is only significant in villages in which households witness some reimbursement resulting from the insurance coverage. In addition, the program stimulates more consumption for experienced participants than for new participants of the program in these villages. Keywords: New Cooperative Medical Scheme; Consumption; Health Insurance; Precautionary Savings; Chinese Saving Puzzle JEL Classification Nos.: D12, E21, I18 Introduction Chinese high and rising saving rate has attracted a lot international attention. Household saving rate has risen by about ten percentage points between 1995 and 2008, reaching 28 percent of the disposable income in 2008, which is higher than most of other countries including East Asian countries (Prasad, 2009). The literature has proposed many explanations for this Chinese Saving Puzzle. A popular one is that the dissolution of the traditional social safety net has created more precautionary savings (Chamon and Prasad, 2008; Meng, 2003). Chinese gov