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Using the China Health and Nutrition Survey, this study quantifies the causal effects of air pollution on the demand for medical insurance from the perspective of avoidance behavior; an instrumental variable approach was used. The rise in air pollution is associated with an increased probability of purchasing medical insurance. Results suggest that the effect of air pollution on the demand for medical insurance may be overestimated without considering the migration of people. Furthermore, the substitution between basic medical and commercial insurance is becoming increasingly evident with the reform of the medical system. The effect of air pollution on the demand for medical insurance is mainly observed on women, children, the elderly, and people with high income and educational levels, all of whom are more likely to take an avoidance behavior. This study suggests that environmental issues must be considered in future medical insurance designs due to avoidance behavior to mitigate the negative effects of poor air quality. Avoidance costs must also be considered when governments formulate environmental policies. • The causal relationship between air pollution and insurance demand is analyzed. • Instrumental variable approach deals with endogenous problems of air pollution. • China Health and Nutrition Survey (CHNS) data in 2004–2015 are used. • Air pollution rises the demand for medical insurance and has heterogeneous effects. • The medical reform is effective in mitigating negative effects of air pollution. [ABSTRACT FROM AUTHOR]