Insurance, Health, and the Utilization of Medical Services

Most data sets indicate a positive correlation between having health insurance and good health, and between having health insurance and utilizing health care services. Yet the direction of causality is not at all clear. If we observe a positive correlation between the utilization of health care services and insurance status, we do not know if this is be-cause people who anticipate poor health buy more insurance (or take jobs with generous medical coverage), or because insurance lowers the cost of health care, increasing the quantity demanded. The direction of causation between health status and insurance is similarly unclear. While a few attempts have been made to implement an instrumental variables (IV) strategy to deal with endogeneity, the instruments chosen have not been entirely convincing. In this paper we revisit the IV estimation of the reduced form relationships between insurance and both health care utilization and health status taking advantage of what we argue is a good instrument - the individual's self-employment status. We find that IV estimates of the impact of insurance on the utilization of a variety of health care services are greater than estimates that ignore endogeneity. However, instrumental variables leads to a small and statistically insignificant estimate of the impact of insurance on health status. The validity of this exercise depends on the extent to which self-employment status is a suitable instrument. To make this case, we analyze panel data on transitions from wage-earning into self-employment and show that individuals who select into self-employment do not differ systematically from those who remain wage-earners with respect to either the utilization of health care or health status. That is, there appear to be no underlying differences that might lead to self-employment per se affecting health status or health services utilization.