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Bankruptcy as Implicit Health Insurance


  • Neale Mahoney

    () (Department of Economics, Stanford University)


This paper examines the interaction between health insurance and the implicit insurance that people have because they can file (or threaten to file) for bankruptcy. With a simple model that captures key institutional features, I demonstrate that the financial risk from medical shocks is capped by the assets that could be seized in bankruptcy. For households with modest seizable assets, this implicit “bankruptcy insurance” can crowd out conventional health insurance. I test these predictions using variation in the state laws that specify the type and level of assets that can be seized in bankruptcy. Because of the differing laws, people who have the same assets and receive the same medical care face different losses in bankruptcy. Exploiting the variation in seizable assets that is orthogonal to wealth and other household characteristics, I show that households with fewer seizable assets are more likely to be uninsured. This finding is consistent with another: uninsured households with fewer seizable assets end up making lower out-of-pocket medical payments. The estimates suggest that if the laws of the least debtor-friendly state of Delaware were applied nationally, 16.3 percent of the uninsured would buy health insurance. Achieving the same increase in coverage would require a premium subsidy of approximately 44.0 percent. To shed light on puzzles in the literature and examine policy counterfactuals, I calibrate a utility-based, micro-simulation model of insurance choice. Among other things, simulations show that “bankruptcy insurance” explains the low take-up of high-deductible health insurance.

Suggested Citation

  • Neale Mahoney, 2011. "Bankruptcy as Implicit Health Insurance," Discussion Papers 10-023, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:10-023

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    References listed on IDEAS

    1. Jeffrey R. Brown & Amy Finkelstein, 2008. "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 98(3), pages 1083-1102, June.
    2. Mark G. Duggan, 2000. "Hospital Ownership and Public Medical Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1343-1373.
    3. Amanda Kowalski, 2016. "Censored Quantile Instrumental Variable Estimates of the Price Elasticity of Expenditure on Medical Care," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(1), pages 107-117, January.
    4. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-277, June.
    5. Herring, Bradley, 2005. "The effect of the availability of charity care to the uninsured on the demand for private health insurance," Journal of Health Economics, Elsevier, vol. 24(2), pages 225-252, March.
    6. Gruber, Jonathan & Simon, Kosali, 2008. "Crowd-out 10 years later: Have recent public insurance expansions crowded out private health insurance?," Journal of Health Economics, Elsevier, vol. 27(2), pages 201-217, March.
    7. Rask, Kevin N. & Rask, Kimberly J., 2000. "Public insurance substituting for private insurance: new evidence regarding public hospitals, uncompensated care funds, and medicaid," Journal of Health Economics, Elsevier, vol. 19(1), pages 1-31, January.
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