Dynamic Inefficiencies in an Employment-Based Health Insurance System: Theory and Evidence

56 Pages Posted: 24 Aug 2007 Last revised: 26 Nov 2010

See all articles by Hanming Fang

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

Date Written: November 1, 2010

Abstract

We investigate the effects of the institutional settings of the U.S. health care system on individuals' life-cycle medical expenditures. We argue that health is a form of human capital that affects labor productivity, and that the employment-based health insurance system may lead to inefficient investment in individuals' health care. The reason is that labor turnover and frictions in the labor market prevent an employer-employee pair from capturing the entire surplus from investment in an employee's health. Thus, the pair underinvests in health capital, and this underinvestment increases medical expenditures during retirement.

We provide extensive empirical evidence consistent with the comparative statics predictions of our model using two datasets, the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS). The magnitude of our estimates suggests a significant degree of inefficiency in health investment in the U.S.

Keywords: Health, Health Expenditure, Turnover, Health Care, Health Insurance, Labor Productivity

JEL Classification: D84, D91, I12

Suggested Citation

Fang, Hanming and Gavazza, Alessandro, Dynamic Inefficiencies in an Employment-Based Health Insurance System: Theory and Evidence (November 1, 2010). Economic Research Initiatives at Duke (ERID) Working Paper No. 26, Available at SSRN: https://ssrn.com/abstract=1008368 or http://dx.doi.org/10.2139/ssrn.1008368

Hanming Fang

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alessandro Gavazza (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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