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Health Insurance over the Life Cycle with Adverse Selection

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  • Martin Dumav

    (Institut für Mathematische Wirtschaftsforschung)

Abstract

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.

Suggested Citation

  • Martin Dumav, 2013. "Health Insurance over the Life Cycle with Adverse Selection," 2013 Meeting Papers 1138, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:1138
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    References listed on IDEAS

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