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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
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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    1. 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.
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    4. 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.
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    7. 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.
    8. 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.
    9. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
    10. 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.
    11. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from long-term care insurance," NBER Working Papers 11039, National Bureau of Economic Research, Inc.
    12. Serdar Ozkan, 2011. "Income Differences and Health Care Expenditures over the Life Cycle," 2011 Meeting Papers 478, Society for Economic Dynamics.
    13. 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).
    14. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
    15. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 299-328.
    16. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
    17. Ausubel, Lawrence M & Deneckere, Raymond J, 1993. "A Generalized Theorem of the Maximum," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 99-107, January.
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