Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts

61 Pages Posted: 4 May 2017 Last revised: 5 May 2017

See all articles by Amy Finkelstein

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Nathaniel Hendren

Harvard University - Department of Economics

Mark Shepard

Harvard University - Harvard Kennedy School (HKS)

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Date Written: May 4, 2017

Abstract

How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts' subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low-income adults. As subsidies decline, insurance take-up falls rapidly, dropping about 25% for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, consistent with adverse selection into insurance. But across the entire distribution we can observe – approximately the bottom 70% of the willingness to pay distribution – enrollee willingness to pay is three to four times below own expected medical costs. As a result, we estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers' average costs, at most half of potential enrollees would buy insurance, and even premiums subsidized down to 10% of average costs would still leave at least 20% uninsured. We briefly consider explanations for this finding – which suggests an important role for uncompensated care for the uninsured – and explore normative implications for insurance subsidies for low-income individuals.

Keywords: Health insurance; subsidies; low-income

JEL Classification: H51, I13

Suggested Citation

Finkelstein, Amy and Hendren, Nathaniel and Shepard, Mark, Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts (May 4, 2017). HKS Working Paper No. RWP17-017, Available at SSRN: https://ssrn.com/abstract=2963259 or http://dx.doi.org/10.2139/ssrn.2963259

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Nathaniel Hendren

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
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Mark Shepard (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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