Abstract

Health insurance typically covers not only the small probability, large loss events emphasized by theory but also routine services like regular checkups. Usage of such services responds to liquidity shocks; people cut back when times are tight, such as during an unemployment spell. As a result, coverage of such services is least valuable in the states of the world in which marginal utility is greatest---an anti-insurance effect. Whether the net effect of health insurance is to improve or worsen risk exposure depends on the insured's relative exposure to health versus non-health risks. I find that for many U.S. households, health insurance worsens risk exposure; on average it targets states of the world in which marginal utility is relatively low. This highlights an important cost of the many policies that subsidize health insurance or health care.