Credit, Default, and Optimal Health Insurance

Jang, Youngsoo (2020): Credit, Default, and Optimal Health Insurance.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit, Default, Bankruptcy, Optimal Health Insurance
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; H - Public Economics > H5 - National Government Expenditures and Related Policies > H51 - Government Expenditures and Health; I - Health, Education, and Welfare > I1 - Health > I13 - Health Insurance, Public and Private; K - Law and Economics > K3 - Other Substantive Areas of Law > K35 - Personal Bankruptcy Law

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