Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010

Abstract

We quantify the effects of the Affordable Care Act (ACA) using a stochastic general equilibrium overlapping generations model with endogenous health capital accumulation calibrated to match U.S. data on health spending and insurance take-up rates. We find that the introduction of an insurance mandate and the expansion of Medicaid which are at the core of the ACA increase the insurance take-up rate of workers to almost universal coverage but decrease capital accumulation, labor supply and aggregate output. The penalties and subsidies do reduce the adverse selection problem in private health insurance markets and do counteract the crowding-out effect of the Medicaid expansion. The redistribution measures embedded in the ACA result in welfare gains of low income individuals in poor health, and conversely, in welfare losses of high income individuals in good health. The overall welfare effect depends on the size of the ex-post moral hazard effect and general equilibrium price adjustments.

Keywords: Affordable Care Act 2010, endogenous health capital, life-cycle health spending and financing, dynamic stochastic general equilibrium

JEL Classification: H51, I18, I38, E21, E62