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Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010

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  • Chung Tran

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  • Juergen Jung

Abstract

In this paper we develop a stochastic dynamic general equilibrium overlapping generations (OLG) model with endogenous health capital to study the macroeconomic effects of the Affordable Care Act of March 2010 also known as the Obama health care reform. We find that the insurance mandate enforced with fines and premium subsidies successfully reduces adverse selection in private health insurance markets and subsequently leads to almost universal coverage of the working age population. On other hand, spending on health care services increases by almost 6 percent due to moral hazard of the newly insured. Notably, this increase in health spending is partly financed by the larger pool of insured individuals and by government spending. In order to finance the subsidies the government needs to either introduce a 2.7 percent payroll tax on individuals with incomes over $200, 000, increase the consumption tax rate by about 1.1 percent, or cut government spending about 1 percent of GDP. A stable outcome across all simulated policies is that the reform triggers increases in health capital, decreases in labor supply, and decreases in the capital stock due to crowding out effects and tax distortions. As a consequence steady state output decreases by up to 2 percent. Overall, we find that the reform is socially beneficial as welfare gains are observed for most generations along the transition path to the new long-run equilibrium.

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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2011-539.

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Length: 48 Pages
Date of creation: Feb 2011
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Handle: RePEc:acb:cbeeco:2011-539

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Cited by:
  1. Cole, Harold L. & Kim, Soojin & Krueger, Dirk, 2012. "Analyzing the effects of insuring health risks: On the trade-off between short run insurance benefits vs. long run incentive costs," CFS Working Paper Series 2012/18, Center for Financial Studies (CFS).
  2. Maria Prados, 2012. "A Life Cycle Approach to the Mechanism Connecting Health Inequality and Earnings Inequality," 2012 Meeting Papers 1145, Society for Economic Dynamics.
  3. Svetlana Pashchenko & Ponpoje Porapakkarm, 2012. "Online Appendix to "Quantitative Analysis of Health Insurance Reform: Separating Regulation from Redistribution"," Technical Appendices 11-70, Review of Economic Dynamics.
  4. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2010. "Quantitative Analysis of Health Insurance Reform: Separating Community Rating from Income Redistribution," MPRA Paper 26158, University Library of Munich, Germany.
  5. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2012. "Quantitative analysis of health insurance reform: separating regulation from redistribution," MPRA Paper 41193, University Library of Munich, Germany.
  6. Ponpoje (Poe) Porapakkarm & Svetlana Pashchenko, 2013. "Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform," 2013 Meeting Papers 1086, Society for Economic Dynamics.
  7. Pedro Gomis Porqueras & Solmaz Moslehi & Richard M. H. Suen, 2013. "Endogenous Health in a Model of Calories, Medical Services and Health Shocks," Economics Series 2013_4, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  8. Manan Roy, 2011. "How Well Does the U.S. Government Provide Health Insurance?," Departmental Working Papers 1102, Southern Methodist University, Department of Economics.
  9. Gerhard Glomm & Juergen Jung & Chung Tran, 2013. "Fiscal Austerity Measures: Spending Cuts vs. Tax Increases," Working Papers 2013-01, Towson University, Department of Economics, revised Aug 2013.
  10. Elena Capatina, 2012. "Life Cycle Effects of Health Risk," Working Papers 201216, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.

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