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Health Insurance over the Life Cycle with Adverse Selection

  • Martin Dumav

    (Institut für Mathematische Wirtschaftsforschung)

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    This paper studies health insurance over the life-cycle with adverse selection to analyze the welfare implications of the Aordable Care Act of 2010 that targets at improving the access to health insurance for the uninsured. For this purpose, this study develops a life-cycle model following Huggett [19] and incorporates health insurance and private information similar to Chatterjee [8]. In particular, the model has: (i) individuals with privately known health type that is persistent and that stochastically aects their health expenses; (ii) competitive insurers that oer contracts against health expenditure risk; and (iii) government sponsors uncompensated care for individuals without private health insurance coverage. The insurers learn from an individual's history of health outcomes and insurance market behavior about his type and encapsulate his likelihood of being a healthy type in a health score. For this economic environment, I establish the existence of competitive equilibrium. Quantitative analysis takes the model to data choosing the parameters of the model to match key data moments such as the fraction of the uninsured non-elderly. The model is broadly consistent with the characteristics of the uninsured: they are usually in low income and poor health. It is also consistent with the persistence of being uninsured. The model is then used to evaluate the potential welfare consequences of the policy proposal that restricts the use of detailed medical information beyond age by the insurers and that extends subsidies to low income individuals for health insurance. A conservative evaluation is that the individuals are willing to forgo 0.3% of their consumption to live in an environment with that policy.

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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1138.

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    Date of creation: 2013
    Date of revision:
    Handle: RePEc:red:sed013:1138
    Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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    1. Juergen Jung & Chung Tran, 2009. "Health Care Financing over the Life Cycle, Universal Medical Vouchers and Welfare," Discussion Papers 2009-12, School of Economics, The University of New South Wales.
    2. Rey, Patrick & Salanie, Bernard, 1990. "Long-term, Short-term and Renegotiation: On the Value of Commitment in Contracting," Econometrica, Econometric Society, vol. 58(3), pages 597-619, May.
    3. MALCOMSON, James M. & SPINNEWYN, Frans, . "The multiperiod principal-agent problem," CORE Discussion Papers RP 803, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Cutler, David M., 2002. "Health care and the public sector," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 31, pages 2143-2243 Elsevier.
    5. Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990. "Short-term contracts and long-term agency relationships," Journal of Economic Theory, Elsevier, vol. 51(1), pages 1-31, June.
    6. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the Elderly Save? The Role of Medical Expenses," NBER Working Papers 15149, National Bureau of Economic Research, Inc.
    7. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
    8. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
    9. Hui He & Hao Zhang & Tim Halliday, 2010. "Health Investment over the Life-Cycle," 2010 Meeting Papers 1179, Society for Economic Dynamics.
    10. Ausubel, Lawrence M & Deneckere, Raymond J, 1993. "A Generalized Theorem of the Maximum," Economic Theory, Springer, vol. 3(1), pages 99-107, January.
    11. Karsten Jeske & Sagiri Kitao, 2007. "U.S. tax policy and health insurance demand: can a regressive policy improve welfare?," FRB Atlanta Working Paper 2007-13, Federal Reserve Bank of Atlanta.
    12. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance," American Economic Review, American Economic Association, vol. 95(2), pages 224-228, May.
    13. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
    14. Randall D. Cebul & James B. Rebitzer & Lowell J. Taylor & Mark E. Votruba, 2011. "Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance," American Economic Review, American Economic Association, vol. 101(5), pages 1842-71, August.
    15. Palumbo, Michael G, 1999. "Uncertain Medical Expenses and Precautionary Saving Near the End of the Life Cycle," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 395-421, April.
    16. Serdar Ozkan, 2011. "Income Differences and Health Care Expenditures over the Life Cycle," 2011 Meeting Papers 478, Society for Economic Dynamics.
    17. Araujo, Aloisio & Mas-Colell, Andreu, 1978. "Notes on the smoothing of aggregate demand," Journal of Mathematical Economics, Elsevier, vol. 5(2), pages 113-127, September.
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