Health and Household Expenditures

We examine the effect of health on household expenditures in the Netherlands
between 2009 and 2017, a period that is characterized by significant increases in out-of-pocket medical expenditures for long-term care. How health affects household spending is an empirical question: on the one hand, health can affect a household’s budget through increased out-of-pocket medical expenditures or, for the working population, through reduced income. On the other hand, health can affect a household’s consumption preferences; help with cleaning, gardening, and home maintenance will likely become more valuable in situations of poor health, while leisure activities can be constrained by poor health. Using expenditure data from the Longitudinal Internet Studies for the Social Sciences (LISS), we estimate how total non-medical and medical expenditures change when health deteriorates, and how the relative shares of different expenditure categories vary with health. We estimate an expenditure-share demand system which includes health status, measured by general health, mental health, functional disabilities, and chronic diseases. We make use of within-household variation in health over time to allow for possible correlation between unobserved household-specific effects and health, such as time preferences that could influence both health and expenditures. The results show that non-medical expenditures slightly decline after an adverse health shock, by between 3% (for general health) and 7% (for severe chronic conditions). Medical expenditures increase, but they do not seem to drive the decline in non-medical expenditures. Instead, preferences seem to change after the onset of an adverse health shock, with more spending on housekeeping and less spending on leisure activities. Since the 2015 long-term care reform, which increased out-of-pocket medical expenditures, unhealthy households spend less on leisure activities, a luxury good. A further increase in out-of-pocket medical expenditures may lead to the risk of unhealthy households having to cut back on necessities as well.