State Dependence among the Uninsured: Accounting for Feedback to Health and Employment

Persistent lack of health insurance might arise from two distinct sources. First, individuals who lack insurance might possess certain traits, also exhibiting persistence, that associate with lower probabilities of having insurance. Second, persistence might arise if lack of insurance in the present period directly increases the probability of lacking insurance in future periods. This second channel, called "true state dependence", implies a causal mechanism from past uninsurance. State dependence can also arise if insurance status "feeds back" to future factors that affect insurance status in subsequent periods. This paper extends standard dynamic models to incorporate feedback from uninsurance to future health and employment. Results indicate that, after incorporating feedback effects, lacking insurance six months ago increases the probability of current uninsurance by 57-59 percentage points. Similarly, lacking insurance two years ago increases the probability of current uninsurance by 18-22 percentage points. The large estimates of state dependence suggest that future uninsurance can be effectively reduced by enacting blanket policies that increase insurance rates now. On the other hand, estimates also reveal that unmeasured heterogeneity contributes more to persistence than observed heterogeneity, especially in the long run. This finding draws into question the effectiveness of implementing new, or expanding upon existing, targeted reforms.