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Reducing Medical Spending of the Publicly Insured: The Case for a Cash-Out Option

45 Pages Posted: 28 Dec 2016  

Svetlana Pashchenko

University of Georgia

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo)

Date Written: September 10, 2016

Abstract

It is well-recognized that individuals' spending on medical care is not entirely necessary but is to some extent discretionary. However, the composition of medical spending into necessary and discretionary parts is not (perfectly) observable. In this paper, we study ways to improve upon existing public health insurance policies using a framework where both the discretionary and necessary components of medical spending are explicitly modeled. We start by constructing a simple theoretical framework in the spirit of Mirrlees (1971) in which only total medical spending is observable, but not its division into discretionary and non-discretionary parts. We show that individuals with low consumption of medical care should be rewarded with high consumption of regular goods. Next, we construct a rich structural life-cycle model and evaluate the quantitative impact of this type of policy with application to public health insurance. The success of each policy is measured by benchmarking it against the full information case in which the division of medical spending into discretionary and non-discretionary components is observable. We show that the best results are achieved by introducing an option to substitute public health insurance with cash transfers. This is because this policy creates a trade-off between regular and medical consumption, which is the main mechanism behind our theoretical results.

Keywords: medical spending, health insurance, optimal taxation, life-cycle models, ex-post moral hazard

JEL Classification: D52, D91, E21, H53, I13, I18

Suggested Citation

Pashchenko, Svetlana and Porapakkarm, Ponpoje, Reducing Medical Spending of the Publicly Insured: The Case for a Cash-Out Option (September 10, 2016). Available at SSRN: https://ssrn.com/abstract=2890693 or http://dx.doi.org/10.2139/ssrn.2890693

Svetlana Pashchenko (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan
+818095248741 (Phone)

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