Smoking Response to Health and Medical Spending Changes and the Role of Insurance

Severe health shocks provide new information about one's personal health and have been shown to influence smoking behaviors. In this paper, we suggest that they may also convey information about the hard to predict financial consequences of illnesses. Relevant financial risk information is idiosyncratic and unavailable to the consumer preceding illness, and the information search costs are high. However, new and salient information about the health as well as financial consequences of smoking after a health shock may impact smoking responses. Using variation in the timing of health shocks and two features of the US health care system (uninsured spells and aging into the Medicare program at 65), we test for heterogeneity in the post‐shock smoking decision according to plausibly exogenous changes in financial risk exposure to medical spending. We also explore the relationship between smoking and the evolution of out‐of‐pocket costs. Individuals experiencing a cardiovascular health shock during an uninsured spell have more than twice the cessation effect of those receiving the illness while insured. For those uninsured prior to age 65 years, experiencing a cardiovascular shock post Medicare eligibility completely offsets the cessation effect. We also find that older adults' medical spending changes separate from health shocks influence their smoking behavior. Copyright © 2016 John Wiley & Sons, Ltd.