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Health insurance and the consumer bankruptcy decision: Evidence from expansions of Medicaid

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  • Gross, Tal
  • Notowidigdo, Matthew J.

Abstract

Anecdotal evidence and several observational studies suggest that out-of-pocket medical costs are pivotal in a large fraction of consumer bankruptcy decisions. In this paper, we assess the contribution of medical costs to household bankruptcy risk by exploiting plausibly exogenous variation in publicly provided health insurance. Using cross-state variation in Medicaid expansions from 1992 to 2004, we find that a 10 percentage point increase in Medicaid eligibility reduces personal bankruptcies by 8%, with no evidence that business bankruptcies are similarly affected. We interpret our findings with a model in which health insurance imperfectly substitutes for other forms of financial protection, and we use the model to present simple calibration results which illustrate how our reduced-form parameter estimate affects the optimal level of health insurance benefits. We conclude with calculations which suggest that out-of-pocket medical costs are pivotal in roughly 26% of personal bankruptcies among low-income households.

Suggested Citation

  • Gross, Tal & Notowidigdo, Matthew J., 2011. "Health insurance and the consumer bankruptcy decision: Evidence from expansions of Medicaid," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 767-778, August.
  • Handle: RePEc:eee:pubeco:v:95:y:2011:i:7-8:p:767-778
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    More about this item

    Keywords

    Health insurance Bankruptcy Medicaid;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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