The impact of adverse health events on consumption: Understanding the mediating effect of income transfers, wealth, and health insurance

• Published in: Health economics Vol. 26; no. 12; pp. 1743 - 1758
• Main Authors: Babiarz, Patryk, Yilmazer, Tansel
• Format: Journal Article
• Language: English
• Published: England Wiley Periodicals Inc 01-12-2017
• Subjects: Commerce; Consumption; Databases, Factual; earnings; Economic models; Family Characteristics; Financing, Personal - economics; Health economics; Health insurance; Health problems; Health status; Households; Housework; Humans; Illnesses; Income; income transfers; Insurance, Health - economics; Mental disorders; Mental Disorders - economics; Mental health; mental illness; out‐of‐pocket medical expenditures; physical illness; Wealth; wealth; earnings; mental illness; out-of-pocket medical expenditures; consumption; income transfers; physical illness
• ISSN: 1057-9230; 1099-1050
• DOI: 10.1002/hec.3496

Using data from the Panel Study of Income Dynamics for years 1999–2013, we investigate the impact of physical and mental illnesses on household consumption and financial status. In comparison to severe physical health problems, mental illnesses lead to larger decreases in labor income. Increases in public and private transfers following the onset of a mental illness do not completely offset the decline in labor income. Consequently, we find a significant decrease in consumption expenditures after the household head experiences a mental problem. On the other hand, public and private transfers and accumulated wealth offset the relatively smaller decline in labor income and enable households with severe physical problems to smooth their consumption. Health insurance helps to prevent larger drops in consumption after the onset of a mental health problem.