Credit, Default, and Optimal Health Insurance
Accepted by the International Economic Review
84 Pages Posted: 5 Aug 2019 Last revised: 28 Dec 2022
Date Written: November 2022
How do credit and default affect optimal health insurance? I answer this question, using a lifecycle
model of health investment with a strategic default option on emergency room (ER) bills
and financial debts. I calibrate the model to the U.S. economy and compare the optimal policy
for Medicaid according to whether the strategic default option and access to credit are available.
I find that the strategic default option induces the optimal policy to be more redistributive.
With the strategic default option, the optimal policy expands Medicaid for households whose
income is below 44 percent of the average income. Without the strategic default option, the
optimal policy provides Medicaid to households whose income is below 25 percent of the average
income. Through the strategic default option, more redistributive reforms can improve
welfare by reducing the dependence on this implicit health insurance and changing young and
low-income households’ medical spending behaviors to be more preventative. In these findings,
the interaction between strategic default and preventative medical spending is important.
When the preventative medical spending channel is shut down, the optimal policy in the case
with the strategic default option is not to expand Medicaid.
Keywords: Credit, Default, Bankruptcy, Optimal Health Insurance
JEL Classification: E21, H51, I13, K35
Suggested Citation: Suggested Citation