Credit, Default, and Optimal Health Insurance

By Youngsoo Jang

How do defaults and bankruptcies affect optimal health insurance policy? I answer this question using a life-cycle model of health investment with the option to default on emergency room (ER) bills and financial debts. I calibrate the model for the U.S. economy and compare the optimal health insurance in the baseline economy with that in an economy with no option to default. With no option to default, the optimal health insurance is similar to the health insurance system in the baseline economy. In contrast, with the option to default, the optimal health insurance system (i) expands the eligibility of Medicaid to 22 percent of the working-age population, (ii) replaces 72 percent of employer-based health insurance with a private individual health insurance plus a progressive subsidy, and (iii) reforms the private individual health insurance market by improving coverage rates and preventing price discrimination against people with pre-existing conditions. This result implies that with the option to default, households rely on bankruptcies and defaults on ER bills as implicit health insurance. More redistributive healthcare reforms can improve welfare by reducing the dependence on this implicit health insurance and changing households’ medical spending behavior to be more preventative.

It sounds trivial, but it needs to be pointed out. Medical debt is like limited liability if people can default on it. In such cases, there is the temptation to take excessive risk, is this case by neglecting on preventive care. The solution is not to forbid default, but rather to provide actual insurance.


One Response to Credit, Default, and Optimal Health Insurance

  1. The point is that defaults and bankruptcies matter for the design of optimal health insurance policy.

    When bankruptcies and defaults are easily accessible, providing actual insurance is the solution, as you mentioned. This case is close to the U.S. In this economy, the optimal health insurance policy is much more redistributive than the current U.S. health insurance system.

    However, in economics where filing for bankruptcy is not easy (i.e. some European countries), households are cautious in managing their health because bad health would otherwise come as huge financial burdens over the life-cycle. In this case, they are eager to share the health and financial risks through precautionary savings. In this economy, the optimal health insurance policy is not so different from the current U.S health insurance system.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: