We show that the provision of even incomplete public insurance can substantially crowd out private insurance demand. We examine the interaction of the public Medicaid program with the private market for long-term care insurance and estimate that Medicaid can explain the lack of private insurance purchases for at least two-thirds and as much as 90 percent of the wealth distribution, even if comprehensive, actuarially fair private policies were available. Medicaid's large crowd out effect stems from the very large implicit tax (on the order of 60 to 75 percent for a median wealth individual) that Medicaid imposes on the benefits paid from private insurance policies. Importantly, Medicaid itself provides an inadequate mechanism for smoothing consumption for most individuals, so that its crowd out effect has important implications for overall risk exposure. An implication of our findings is that public policies designed to stimulate private insurance demand will be of limited efficacy as long as Medicaid continues to impose this large implicit tax.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10989.
Length: Date of creation: Dec 2004 Date of revision: Handle: RePEc:nbr:nberwo:10989
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Find related papers by JEL classification: H4 - Public Economics - - Publicly Provided Goods H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cutler, David M., 2002.
"Health care and the public sector,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 31, pages 2143-2243
Elsevier.
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Norton, Edward C., 2000.
"Long-term care,"
Handbook of Health Economics,
in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 17, pages 955-994
Elsevier.
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