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Income Differences and Health Care Expenditures over the Life Cycle

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  • Serdar Ozkan

    (University of Pennsylvania)

Abstract

This paper studies differences in the lifetime profile of health care usage between low- and high-income groups. Using data from the Medical Expenditure Panel Survey (MEPS) I find that early in life the rich spend significantly more on health care, whereas midway through life until old age the medical spending of the poor exceeds dramatically that of the rich. In addition, the distribution of the poor's medical expenditures has fatter left and right tails. To account for these facts, I develop and estimate a life-cycle model of two distinct types of health capital: preventive and physical. Physical health capital determines survival probabilities, whereas preventive health capital governs the distribution of shocks to physical health capital, thereby controlling the expected lifetime. Moreover, I incorporate important features of the US health care system such as private health insurance, Medicaid, and Medicare. In the model, optimal expected lifetime is longer for the rich which can only be achieved by larger investment in preventive health capital. Therefore, as they age, their health shocks grow milder compared to the poor, and in turn they incur lower curative medical expenditures. Public insurance in old age amplifies this mechanism by hampering the incentives of the poor to invest in preventive health capital. I use the model to examine a counterfactual economy with universal health insurance in which 75% of the preventive medical spending is reimbursed on top of the existing coverage. My results suggest that policies encouraging the use of health care by the poor early in life have significant welfare gains, even when fully accounting for the increase in taxes required to pay for them.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 478.

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Date of creation: 2011
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Handle: RePEc:red:sed011:478

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Cited by:
  1. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
  2. 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).
  3. Mariacristina De Nardi & Eric French & John Bailey Jones, 2013. "Medicaid Insurance in Old Age," NBER Working Papers 19151, National Bureau of Economic Research, Inc.
  4. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 255-326.
  5. 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.
  6. Martin Dumav, 2013. "Health Insurance over the Life Cycle with Adverse Selection," 2013 Meeting Papers 1138, Society for Economic Dynamics.
  7. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2013. "Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform," MPRA Paper 48054, University Library of Munich, Germany.

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