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Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs

Author

Listed:
  • Harold L. Cole

    () (Department of Economics, University of Pennsylvania and NBER)

  • Soojin Kim

    () (Krannert School of Management, Department of Economics, Purdue University)

  • Dirk Krueger

    () (Department of Economics, University of Pennsylvania, CEPR, CFS, NBER and Netspar)

Abstract

This paper constructs a dynamic model of health insurance to evaluate the short- and long-run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (such as Americans with Disability Act of 1990, ADA, and its amendment in 2008, the ADAAA) and that prohibits health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although the competitive equilibrium features too little consumption insurance and a combination of both policies is effective in providing such insurance period by period, it is suboptimal to introduce both policies jointly since such a policy innovation severely undermines the incentives to lead healthier lives and thus induces a more rapid deterioration of the cohort health distribution over time. This effect more than offsets the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to implementing wage nondiscrimination legislation alone. This is true despite the fact that both policy options are strongly welfare improving relative to the competitive equilibrium.

Suggested Citation

  • Harold L. Cole & Soojin Kim & Dirk Krueger, 2014. "Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs," PIER Working Paper Archive 14-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:14-023
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Guner, Nezih & Kulikova, Yuliya & Llull, Joan, 2018. "Marriage and health: Selection, protection, and assortative mating," European Economic Review, Elsevier, vol. 104(C), pages 138-166.
    2. Eric French & John Bailey Jones, 2017. "Health, Health Insurance, and Retirement: A Survey," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 383-409, September.
    3. Hanming Fang & Naoki Aizawa, 2012. "Equilibrium Labor Market Search and Health Insurance Reform," 2012 Meeting Papers 959, Society for Economic Dynamics.
    4. Laurence Ales & Roozbeh Hosseini & Larry Jones, "undated". "Is There ``Too Much'''' Inequality in Health Spending Across Income Groups?," GSIA Working Papers 2014-E18, Carnegie Mellon University, Tepper School of Business.
    5. Naoki Aizawa & Hanming Fang, 2015. "Equilibrium Labor Market Search and Health Insurance Reform, Second Version," PIER Working Paper Archive 15-024, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2015.
    6. Schön, Matthias, 2015. "Unemployment, Sick Leave and Health," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113013, Verein für Socialpolitik / German Economic Association.
    7. David Chivers & Zhigang Feng & Anne Villamil, 2017. "Employment-based Health Insurance and Misallocation: Implications for the Macroeconomy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 125-149, January.

    More about this item

    Keywords

    Health Risks; Social Insurance; Health Effort Choices;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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