Life Cycle Responses to Health Insurance Status

Health insurance status can change over the life cycle for exogenous reasons
(e.g. Medicare for the elders, P-PAC for younger agents, termination of cover-
age at retirement in employer-provided plans). Durability of the health capital,
endogenous mortality and morbidity, as well as backward induction suggests that these changes should a ect the dynamic life cycle beyond the period at which they occur. The purpose of this paper is to study these lifetime e ects on the optimal allocation (consumption, leisure, health expenditures), and status (health, wealth and survival rates). We analyze the impact of young (resp. old) insurance status conditional on old (resp. young) coverage through the structural estimation of a dynamic model with endogenous death and sickness risks. Our results show that young insurees are healthier, wealthier, consume more health care yet are less exposed to OOP risks, and substitute less (more) leisure before (after) retirement. Old insurees show similar patterns, except for lower precautionary wealth balances. Compulsory health insurances is unambiguously optimal for elders, and for young agents, except early in the life cycle. We draw other implications for public policy such as Medicare and P-PAC.

Pascal St.-Amour
University of Lausanne
26. Nov. 2013

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