Coping (more or less) with health shocks: A longitudinal perspective on financial protection from Nepal

Catastrophic and impoverishing health spending – two indicators of financial protection used to monitor Universal Health Coverage – are usually estimated from cross-sectional data. Using a three-year (2016–2018) panel of households in non-metropolitan Nepal, we add to scant evidence on the dynamics of these indicators and test whether non-medical consumption falls when the indicators rise in response to health shocks. We find that catastrophic and impoverishing health spending are mostly transitory: at least 80% of episodes in one year do not continue into the next. A health shock is estimated to raise the likelihood of catastrophic and impoverishing health spending by 36.7 and 7.5 percentage points, respectively. Income falls by an estimated 11.7% if the shock is to a working head of household. Despite these effects, non-medical consumption does not fall. Consumption is smoothed mainly through use of savings and other coping that need not overly compromise long-run consumption potential. While this is somewhat reassuring given catastrophic health spending is mostly transitory, a sizeable minority has recurrent catastrophic spending, some households rely on more pernicious coping strategies, and others make no recourse to coping, in which case, a health shock is estimated to reduce consumption by 14.3%.