This article, by examining the impact of illness on consumption variation and the capacity of existing risk-sharing arrangements in insuring consumption against illness in Ethiopia, provides some policy-relevant information. There is evidence concerning whether and to what extent illness affects the variation of consumption across households and through time. Policy makers evaluate the capacity of households and/or existing risk-sharing arrangements in insuring consumption against health risks. It also provides information about the most vulnerable groups of the rural population and shows which types of consumption items are more sensitive to health shocks. Finally, it gives some clue as to what extent the smoothing process is incomplete, and it indicates the potential welfare gain of modifying and strengthening existing risk-sharing arrangements or introducing health insurance or prepayment schemes in rural areas.