Analyzing the Effects of Insuring Health Risks

60 Pages Posted: 8 Oct 2016

See all articles by Harold L. Cole

Harold L. Cole

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

Soojin Kim

University of Pennsylvania

Dirk Krueger

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 1, 2016

Abstract

This paper quantitatively evaluates the trade-off between the provision of social insurance and the incentives to maintain good health through costly investments of labor market and health insurance policies. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (such as the 2008 amendment of the Americans with Disability Act from 1990, the ADAAA) and that prohibits health insurance companies from charging different premiums for workers of different health (a provision in the Patient Protection and Affordable Care Act, PPACA, that went in effect in 2014). To do so we construct and estimate (using PSID and MEPS data) a dynamic model of health investments and health insurance in which the cross-sectional health distribution evolves endogenously and is shaped by labor market and health insurance policies.

The static gains from better insurance against poor health induced by these policies are traded off against their adverse dynamic incentive effects on household efforts to lead a healthy life. In our quantitative analysis we find that although the competitive equilibrium features too little consumption insurance and a combination of both policies is effective in providing such insurance period by period, it is suboptimal (from an ex-ante welfare perspective) to introduce both policies jointly since such a policy innovation severely undermines the incentives to lead healthier lives and thus induces a more rapid deterioration of the cohort health distribution over time. This effect more than offsets the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to implementing one policy in isolation.

Keywords: Health Risks, Social Insurance, Health Effort Choices

JEL Classification: E61, H31, I18

Suggested Citation

Cole, Harold L. and Kim, Soojin and Krueger, Dirk, Analyzing the Effects of Insuring Health Risks (September 1, 2016). Available at SSRN: https://ssrn.com/abstract=2848414 or http://dx.doi.org/10.2139/ssrn.2848414

Harold L. Cole

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
436 McNeil
Philadelphia, PA 19104
United States
215-898-7788 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Soojin Kim

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

Dirk Krueger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6691 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~dkrueger/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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