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CHAPTER 1. BANKRUPTCY 33 Puzzle 3: Rising risk, falling coverage A third puzzle is the association between rising health insurance costs and falling coverage. ? show that more than half the decrease in insurance coverage over the 1990s can be explained by rising premiums. Yet as the authors explain, from the standpoint of economic theory this is counterintuitive. With standard risk preferences, rising un- derlying costs should lead to increased insurance coverage. Taking bankruptcy into account, however, reverses this intuition. The decrease in coverage can be explained by households substituting conventional health insurance for bankruptcy insurance that is increasing in actuarial value without increasing in price. Puzzle 4: The insurance generosity gap A fourth puzzle is the insurance generosity gap. In his review of the literature, ? asks why most U.S. households appear to be either under-insured or over-insured but rarely in-between. Implicit insurance from bankruptcy can explain this finding. To illustrate how bankruptcy insurance creates a generosity gap, Figure 1.11 presents a stylized budget set. Without bankruptcy, households face the standard continuous tradeoff between insurance generosity (y-axis) and other goods (x-axis). Implicit insurance generates a notch: households receive some implicit insurance without giving up other goods. Convex preferences give rise to an insurance generosity gap, with households sorting into the more generous conventional health insurance and the less generous implicit insurance from bankruptcy. 1.8.2 Policy Implications I use the micro-simulation model to examine welfare implications of this mechanism. From a policy design perspective, bankruptcy insurance has many potential draw- backs: It forces the uninsured to receive care in emergency rooms, which are often not the most appropriate settings (?), and may lead to inefficiently low levels of preventative care, inflating overall costs (?). Negotiation under the threat-point of bankruptcy is probably not the most efficient way of processing payments and there are deadweight costs and externalities to formal bankruptcy.
CHAPTER 1. BANKRUPTCY 34 For this exercise, however, I focus on a single problem: because bankruptcy insurance has a price of zero but cross-subsidized costs, too many households choose to be uninsured. I find this inefficiency particularly interesting because it directly relates to the insurance coverage decision and because the problem is naturally addressed with penalties for being uninsured—a key and controversial element of PPACA. 41 Of course, conventional health insurance has well-documented inefficiencies as well. Relative to bankruptcy insurance, moral hazard is particularly relavent. 42 With conventional health insurance it is well known that medical providers and patients often have incentives to supply and demand excess medical care. With bankruptcy insurance, on the other hand, physicians are more likely to be exposed to the social cost of their decisions and patients have little leverage to demand excess treatment. Thus, for the optimal “Pigovian penalties,” low moral hazard bankruptcy insurance may be the efficient choice for some households. Table 1.11 shows the welfare effects of different penalty systems. For each penalty system, I allow households to choose between conventional insurance at the calibrated premiums and bankruptcy insurance at the cost of the penalty. 43 The results are shown relative to a baseline in which households can choose bankruptcy at no cost. The first set of rows shows coverage and welfare under the optimal Pigovian penalties—defined as the household-specific actuarially fair cost of the implicit insurance from bankruptcy. 44 The optimal penalties average $218 per person and induce 7 to 8 percent of the uninsured to take-up coverage. As indicated by the higher willingness to pay, these households purchase more generous coverage than they had from bankruptcy. Due to the increased moral hazard, however, costs rise by almost as much. The net effect is an increase in surplus of only $4 to $5 per person. The second panel shows the welfare effects of the PPACA penalty system. When fully implemented in 2016, these penalties will equal the greater of $625 or 2.5 percent 41For this exercise, I assume that uninsured households are not already subsidized through the tax code or some other channel. 42Empirically, adverse selection does not seem to affect insurance choice on the extensive margin (??). 43Recall that calibrated premiums are calculated using costs scaled up for moral hazard, administrative loading, and the cross-subsidization of the uninsured. 44That is, expected medical costs above seizable assets.
Page 1 and 2: ESSAYS IN PUBLIC FINANCE AND INDUST
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Chapter 3 Private Coverage and Publ
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CHAPTER 3. MEDIGAP 119 be of intere
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CHAPTER 3. MEDIGAP 140 (10000,11000
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