Credit, Default, and Optimal Health Insurance

88 Pages Posted: 5 Aug 2019 Last revised: 15 May 2020

See all articles by Youngsoo Jang

Youngsoo Jang

University of Queensland - School of Economics

Date Written: April 2020

Abstract

How do defaults and bankruptcies affect optimal health insurance policy? I answer this question,
using a life-cycle model of health investment with an option to default on emergency room
(ER) bills and financial debts. I calibrate the model to the U.S. economy and compare the optimal
health insurance policies according to whether the option to default is available. I find that
the option to default induces the optimal policy to be more redistributive. Without the option
to default, the optimal policy expands Medicaid for households whose income is below 30.8
percent of the average income without changing policies related to private health insurance.
With the option to default, in addition to Medicaid expansion, the optimal policy offers a progressive
subsidy for the purchase of private health insurance to all households whose income is
above the threshold of income eligibility for Medicaid and reforms the private health insurance
market by improving coverage rates and preventing price discrimination based on pre-existing
conditions. This disparity implies that households rely on bankruptcies and defaults on ER
bill as implicit health insurance. More redistributive reforms can improve welfare by reducing
the dependence on this implicit health insurance and changing households’ medical spending
behavior to be more preventative.

Keywords: Credit, Default, Bankruptcy, Optimal Health Insurance

JEL Classification: E21, H51, I13, K35

Suggested Citation

Jang, Youngsoo, Credit, Default, and Optimal Health Insurance (April 2020). Available at SSRN: https://ssrn.com/abstract=3429441 or http://dx.doi.org/10.2139/ssrn.3429441

Youngsoo Jang (Contact Author)

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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