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Analyzing the Effects of Insuring Away Health Risks

Author

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  • Soojin Kim

    (University of Pennsylvania)

  • Dirk Krueger

    (University of Pennsylvania)

  • Harold Cole

    (University of Pennsylvania)

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 (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit 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 tradeoff 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 cross-sectional consumption dispersion, the evolution of the cross-sectional health distribution of a cohort of households as well as ex-ante lifetime welfare of a typical member of this cohort. We find that although a combination of both policies is effective in providing full consumption insurance in the short run, it lowers social welfare since it induces a more rapid deterioration of the cohort health distribution over time. Interestingly, introducing each law in isolation has limited adverse dynamic incentive effects, but a combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that social welfare, measured in terms of the expected discounted lifetime utility, declines as a result of introducing both policy measures in conjunction.

Suggested Citation

  • Soojin Kim & Dirk Krueger & Harold Cole, 2012. "Analyzing the Effects of Insuring Away Health Risks," 2012 Meeting Papers 609, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:609
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    References listed on IDEAS

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    Cited by:

    1. Juergen Jung & Chung Tran, 2018. "Optimal Progressive Income Taxation in a Bewley-Grossman Framework," ANU Working Papers in Economics and Econometrics 2018-662, Australian National University, College of Business and Economics, School of Economics.

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