Working Paper: NBER ID: w18529
Authors: Gary D. Hansen; Minchung Hsu; Junsang Lee
Abstract: The steady state general equilibrium and welfare consequences of health insurance reform are evaluated in a calibrated life-cycle economy with incomplete markets and endogenous labor supply. Individuals face uncertainty each period about their future health status, medical expenditures, labor productivity, access to employer provided group health insurance, and the length of their life. In this environment, incomplete markets and adverse selection, which restricts the type of insurance contracts available in equilibrium, creates a potential role for health insurance reform. In particular, we consider a policy reform that would allow older workers (aged 55-64) to purchase insurance similar to Medicare coverage. We find that adverse selection eliminates any market for a Medicare buy-in if it is offered as an unsubsidized option to individual private health insurance. Hence, we compare the equilibrium properties of the current insurance system with those that obtain with an optional buy-in subsidized by the government, as well as with several types of health insurance mandates.
Keywords: Health Insurance; Medicare Buy-In; Adverse Selection; Welfare Economics
JEL Codes: E6; H51; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| availability of unsubsidized Medicare (I13) | market dynamics (D49) |
| 30% subsidy (H23) | uninsured rate among individuals aged 55-64 (I13) |
| subsidy levels (H23) | participation rates (J22) |
| participation rates (J22) | total labor tax rates required to fund the program (J32) |
| insurance mandate (G52) | welfare for individuals of all ages (I38) |
| lower subsidy of 17% (H23) | uninsured rates (I13) |