2008), “Can Insurance Increase Financial Risk? The Curious Case of Health Insurance in

The most basic argument for insurance is that it reduces financial risk. But since insurance opens up new opportunities for consuming expensive high-tech care which permits health improvements that are valued by the insured, and because in many settings the provider is able and has an incentive to exploit the informational advantage she has over the patient, it is not immediately obvious that insurance will in practice reduce financial risk. We analyze the effect of insurance on the probability of an individual incurring ‘high ’ annual health expenses using data from three household surveys—one a cross-section, the other two panels. All come from China, a country where providers have until recently largely been paid fee-for-service (often according to a schedule that encourages the overprovision of high-tech care and the underprovision of basic care) and who are only lightly regulated. We define annual spending as ‘high ’ if it exceeds 5 % of average income in the sample and as ‘catastrophic ’ if it exceeds 10 % of the household’s own per capita income. Our estimates of the effect of insurance on financial risk allow for the possible endogeneity of health insurance in the panel datasets by allowing for a time-invariant fixed effect capturing unobserved risk that may be correlated with insurance status, and in the cross-section dataset by using instrumental variables, where we use availability of and eligibility for health insurance as instruments. Our results suggest that during the 1990s China’s government and labor insurance schemes increased financial risk associated with househol