Working Paper: NBER ID: w10989
Authors: Jeffrey R. Brown; Amy Finkelstein
Abstract: We show that the provision of even incomplete public insurance can substantially crowd out private insurance demand. We examine the interaction of the public Medicaid program with the private market for long-term care insurance and estimate that Medicaid can explain the lack of private insurance purchases for at least two-thirds and as much as 90 percent of the wealth distribution, even if comprehensive, actuarially fair private policies were available. Medicaid's large crowd out effect stems from the very large implicit tax (on the order of 60 to 75 percent for a median wealth individual) that Medicaid imposes on the benefits paid from private insurance policies. Importantly, Medicaid itself provides an inadequate mechanism for smoothing consumption for most individuals, so that its crowd out effect has important implications for overall risk exposure. An implication of our findings is that public policies designed to stimulate private insurance demand will be of limited efficacy as long as Medicaid continues to impose this large implicit tax.
Keywords: No keywords provided
JEL Codes: H4; H51; I11; J14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Medicaid (I18) | reduced demand for private insurance (G52) |
| Medicaid (I18) | implicit tax on private insurance benefits (G52) |
| Medicaid provides inadequate consumption smoothing (D15) | reduced incentive to purchase private insurance (G52) |
| Changes to the Medicaid system (I18) | increase private insurance demand (G52) |