nep-ias New Economics Papers
on Insurance Economics
Issue of 2005‒09‒29
fifteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Health insurance and tax policy By Karsten Jeske; Sagiri Kitao
  2. The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare By Amy Finkelstein
  3. Preliminary analysis of claims data to understand relationship between disease patterns and quality of care and its implications for health insurance in India By Bhat Ramesh; Rajagopal Srikanth
  4. Insurance and Innovation in Health Care Markets By Darius Lakdawalla; Neeraj Sood
  5. What Did Medicare Do (And Was It Worth It)? By Amy Finkelstein; Robin McKnight
  6. The Kerry-Bush Health Care Proposals: A Characterization and Comparison of their Impacts on Connecticut (Technical Appendix) By Stan McMillen; Kathryn Parr; Xiumei Song; Brian Baird
  7. Report of the Georgia Governor’s Wokers’ Compensation Review Commission By Thomas A. Eaton; David B. Mustard
  8. Disability Risk and the Value of Disability Insurance By Amitabh Chandra; Andrew A. Samwick
  9. Risk-Sharing Networks By Yann Bramoullé; Rachel Kranon
  10. Risk Equalisation and Competition in the Irish Health Insurance Market. By Sean Barrett;
  11. Income Volatility and Residential Mortgage Delinquency: Evidence from 12 EU countries By Luis Diaz-Serrano
  12. Managing Systemic Liquidity Risk in Financially Dollarized Economy By Alain Ize; Miguel Kiguel; Eduardo Levy Yeyati
  13. Managed care and the safety net: More pain for the uninsured? By Mas, Nuria
  14. Insurance and Opportunities: The Welfare Implications of Rising Wage Dispersion By Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
  15. Business Cycles, Unemployment Insurance, and the Calibration of Matching Models By James S. Costain; Michael Reiter

  1. By: Karsten Jeske; Sagiri Kitao
    Abstract: The U.S. tax policy on health insurance favors only those offered a group insurance through their employers. This policy is highly regressive since the subsidy takes the form of deductions from the progressive tax system. The paper investigates alternatives to the current policy. We find that the complete removal of the subsidy results in a significant reduction in the insurance coverage and serious welfare deterioration. However, eliminating regressiveness in the group insurance subsidy and extending benefits to the private insurance market improve welfare and raise the coverage. Our work is the first in highlighting the importance of studying health policy in a general equilibrium framework with an endogenous demand for the health insurance. We use the Medical Expenditure Panel Survey (MEPS) to calibrate the process for income, health expenditure shocks, and health insurance offer status and succeed in producing the pattern of insurance demand as observed in the data, which serve as a solid benchmark for the policy experiments.
    Date: 2005
  2. By: Amy Finkelstein
    Abstract: This paper investigates the effects of market-wide changes in health insurance by examining the single largest change in health insurance coverage in American history: the introduction of Medicare in 1965. I estimate that the impact of Medicare on hospital spending is substantially larger than what the existing evidence from individual-level changes in health insurance would have predicted. Consistent with a disproportionately larger impact of aggregate changes in health insurance, the evidence suggests that the introduction of Medicare altered the practice of medicine. For example, I find that the introduction of Medicare is associated with an increase in the rate of adoption of then-new medical technologies. A back of the envelope calculation based on the estimated impact of Medicare suggests that the overall spread of health insurance between 1950 and 1990 may be able to explain at least forty percent of the increase in real per capita health spending over this time period.
    JEL: H51 I11 I18
    Date: 2005–09
  3. By: Bhat Ramesh; Rajagopal Srikanth
    Abstract: This paper provides preliminary analysis of claims data of Mediclaim insurance scheme to understand the relationship between disease pattern and the quality of health care. We use length of stay (LOS) and average length of stay (ALS) as one of the indicators of quality of care. We use the Diagnostic Related Grouping (DRG) based ALS as the benchmark to make this evaluation and comparison. It is observed that the reimbursements in insurance system are tied to hospital inputs and resource use and not to diagnostic related groups or outputs. Therefore the current system of reimbursements and provider payment system influences the length of stay and there is significant variation in ALS observed across disease groups and its sub-groups. There is no consistency observed in ALS as the severity of diseases under each group increases. This reflects lack of standards/protocols and unintended consequences of current practice of provider payment system. Implementing systems like Diagnosis Related Grouping would be an attempt to link it with outcomes. The paper provides insights into whether there is a significant mismatch in the premium that insurance companies charge in comparison to the risk insurer undertake while issuing policies. It was also found that after adjusting for the purchasing power parity, the claims data suggest that healthcare costs reimbursed for medical insurance to private providers in India are actually higher than healthcare costs reimbursed to providers of healthcare in the US under DRG system. The paper argues that under less regulated private healthcare providers market and health insurance market, cost based reimbursement is highly undesirable. The regulators should put in place a system of pre-determined rates for reimbursements in health insurance.
    Date: 2005–09–13
  4. By: Darius Lakdawalla; Neeraj Sood
    Abstract: Innovation policy often involves an uncomfortable trade-off between rewarding innovators sufficiently and providing the innovation at the lowest possible price. However, in health care markets with insurance for innovative goods, society may be able to ensure efficient rewards for inventors and the efficient dissemination of inventions. Health insurance resembles a two-part pricing contract in which a group of consumers pay an up-front fee ex ante in exchange for a fixed unit price ex post. This functions as if innovators themselves wrote efficient two-part pricing contracts, where they extracted sufficient profits from the ex ante payment, but still sold the good ex post at marginal cost. As a result, we show that complete, efficient, and competitive health insurance for innovative products - such as new drugs, medical devices, or patented procedures - can lead to perfectly efficient innovation and utilization, even when moral hazard exists. Conversely, incomplete insurance markets in this context lead to inefficiently low levels of innovation. Moreover, optimally designed public health insurance for innovative products can solve the innovation problem by charging ex ante premia equal to consumer surplus, and ex post co-payments at or below marginal cost. When these quantities are unknown, society can usually improve static and dynamic welfare by covering the uninsured with contracts that mimic observed private insurance contracts.
    JEL: I1 O3
    Date: 2005–09
  5. By: Amy Finkelstein; Robin McKnight
    Abstract: We study the impact of the introduction of one of the major pillars of the social insurance system in the United States: the introduction of Medicare in 1965. Our results suggest that, in its first 10 years, the establishment of universal health insurance for the elderly had no discernible impact on their mortality. However, we find that the introduction of Medicare was associated with a substantial reduction in the elderly’s exposure to out of pocket medical expenditure risk. Specifically, we estimate that Medicare’s introduction is associated with a forty percent decline in out of pocket spending for the top quartile of the out of pocket spending distribution. A stylized expected utility framework suggests that the welfare gains from such reductions in risk exposure alone may be sufficient to cover between half and three-quarters of the costs of the Medicare program. These findings underscore the importance of considering the direct insurance benefits from public health insurance programs, in addition to any indirect benefits from an effect on health.
    JEL: H51 I11 I18
    Date: 2005–09
  6. By: Stan McMillen; Kathryn Parr; Xiumei Song; Brian Baird
    Keywords: health care, Connecticut, health insurance
    JEL: I18 H51
    Date: 2004–10
  7. By: Thomas A. Eaton (Universtiy of Georgia); David B. Mustard (University of Georgia)
    Abstract: The Commission appointed by Governor Barnes consists of fourteen members, three ex officio members, and seven advisory members. This group includes academics, members of the legislature, claimants attorneys, defense attorneys, representatives from the insurance industry, organized labor, the textile industry, and government agencies. It was charged by the Governor to review and evaluate Georgia’s laws and procedures affecting workers’ compensation. The Commission’s primary goal was to prepare an accurate description of the current workers’ compensation system in Georgia. More specifically, this Report provides detailed information regarding the number of claims, benefits paid to employees, employer costs, and insurance profitability. It also compares workers’ compensation costs and benefits in Georgia with those in other states, particularly our Southeastern neighbors. Our purpose is to determine whether workers’ compensation costs place Georgia employers at a competitive disadvantage in regional and national markets. In preparing this Report, the Commission relied on the most recent available reports and data collected by organizations such as the National Academy of Social Insurance, the National Council on Compensation Insurance, the Workers Compensation Research Institute, the United States Department of Labor, and the Georgia State Board of Workers’ Compensation.
    Keywords: Workers' Compemsation, wages, unemployment, disability, indemnity
    JEL: K
    Date: 2005–09–14
  8. By: Amitabh Chandra; Andrew A. Samwick
    Abstract: We estimate consumers’ valuation of disability insurance using a stochastic lifecycle framework in which disability is modeled as permanent, involuntary retirement. We base our probabilities of worklimiting disability on 25 years of data from the Current Population Survey and examine the changes in the disability gradient for different demographic groups over their lifecycle. Our estimates show that a typical consumer would be willing to pay about 5 percent of expected consumption to eliminate the average disability risk faced by current workers. Only about 2 percentage points reflect the impact of disability on expected lifetime earnings; the larger part is attributable to the uncertainty associated with the threat of disablement. We estimate that no more than 20 percent of mean assets accumulated before voluntary retirement are attributable to disability risks measured for any demographic group in our data. Compared to other reductions in expected utility of comparable amounts, such as a reduction in the replacement rate at voluntary retirement or increases in annual income fluctuations, disability risk generates substantially less pre-retirement saving. Because the probability of disablement is small and the average size of the loss — conditional on becoming disabled — is large, disability risk is not effectively insured through precautionary saving.
    JEL: H0 I1 J1
    Date: 2005–09
  9. By: Yann Bramoullé; Rachel Kranon
    Abstract: This paper considers the formation of risk-sharing networks. Following empirical findings, we build a model where risk-sharing takes place between pairs of individuals. We ask what structures emerge when pairs can agree to form links, but people cannot coordinate links across a population. We consider a benchmark model where identical individuals commit to share their monetary holdings equally with linked partners. We compare efficient networks to equilibrium networks. Efficient networks can (indirectly) connect all individuals and involve full insurance. However, equilibrium networks connect fewer individuals. There is an externality: when breaking a link individuals do not take into account the negative effect on others distant in the network. The network formation process can lead identical individuals to be in different positions and thus have different risk-sharing outcomes. These results may help explain empirical findings that risk-sharing is often not symmetric or complete.
    Keywords: Informal insurance, social networks
    JEL: O17 D85 Z13
    Date: 2005
  10. By: Sean Barrett; (Department of Economics, Trinity College)
    Abstract: The analysis contained in the YHEC report indicates that the report did not consider adequately the role of competition in the market for health insurance. This is a major weakness and appears in part to be due to a late deletion of competition from the report’s final research brief by the HIA.(p.90) The evidence on the average age of BUPA Ireland members, 38 years and VHI members, 44 years provides no basis for transfers from BUPA Ireland to VHI. In the case of females between 38 and 44 years health expenditures decline with extra years. The regressiveness of the transfers and cross subsidies in Irish health insurance under community rating is illustrated by the internal transfers from low cost profitable Plans A and B within VHI to high cost loss making Plans C, D and E. Under the proposed transfer of €34m a year from BUPA Ireland to VHI a low cost BUPA essential health insurance cover with a premium of €272.39 would be levied to cross subsidise VHI Plan E costing €1,316.33 per adult. The price of the most expensive subsidised product under the HIA proposal is 4.8 times the price of the product to be levied in order to finance the cross subsidisation. The average BUPA premium was €327 while the average VHI premium was €435. The price of the average product to be subsidised is therefore 33% greater than the price of the average product to be levied to finance the cross subsidisation. CSO data confirms that expenditure on health insurance rises over all ten income deciles. Incomes in the top decile are 10.1 times those in the bottom decile but health insurance expenditure is 22.9 times greater. Section C of this report deals with the HIA letter to BUPA Ireland requiring the equalisation payment of €34m annually from BUPA Ireland for transfer to VHI which had operating profits of €73.3m (before unexpired risk reserve) in their accounts to February 2004. The HIA presents no analysis of the rationale for the payment. It mistakenly asserts that consumers as a whole will be better off from levying one firm in order to cross-subsidise another. It asserts without evidence that the payments required are significant, rising, likely to rise further in the absence of risk equalisation and that in their absence the stability of the industry will be threatened. While there is recognition of possible withdrawal from BUPA Ireland of some younger members because of the price rise in order to finance payments to VHI there is no recognition in the letter of the benefits of competition to health insurance consumers. Section D examines the competition issues neglected by both YHEC and HIA and the benefits foregone by the anti-competitive levies imposed on BUPA. The Irish health service is characterised by high costs and rent-seeking by producers which are extreme by EU standards. The scope for immediate cost savings and further future leveraged savings in a high cost health service is therefore large but these benefits are foregone by regulators adopting the anticompetitive levies recommended by the regulator in this sector.
    Date: 2005–08
  11. By: Luis Diaz-Serrano (National University of Ireland Maynooth, IZA Bonn, CREB Barcelona)
    Abstract: We investigate the socio-economic determinants of mortgage delinquency in 12 EU countries and observe that income volatility significantly increases the mortgage delinquency risk. This pattern even holds for borrowers with higher-income profiles if volatility in income is high enough. From this result we can draw the following conclusions i) mortgage protection insurance policies might be failing to cover those borrowers most in need ii) the existence of credit market imperfections, and iii) the inability for a number of borrowers most at income risk to accumulate precautionary savings in order to meet mortgage payments when shocks in income arise.
    Keywords: Income volatility,mortgage delinquency,mortgage insurance
    JEL: D1 R0 J0
    Date: 2005–02
  12. By: Alain Ize; Miguel Kiguel; Eduardo Levy Yeyati
    Abstract: This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of “circuit breakers.” The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks’ liquidity.
    Date: 2005
  13. By: Mas, Nuria (IESE Business School)
    Abstract: The introduction of managed care has dramatically changed the US health care market. However, most of the literature has focused on analyzing the performance of managed care relative to other types of health insurance, while research focusing on its impact on the uninsured has been minimal. This paper contributes to fill this gap and analyses the impact of managed care on access to care and quality of care for the uninsured. We expand Frank and Salkever's (1991) model to analyze hospitals' decision to provide charity care and use a probit model to test the results empirically. We find that managed care has negatively affected both aspects of the uninsured's health, by increasing the probability of closure of the safety net hospitals and the services most used by the uninsured, and by negatively affecting the quality of government hospitals. Therefore the impact of managed care goes beyond its effect on its enrollees and on efficiency. In fact, by increasing price competition and reducing hospital revenues, managed care penetration has affected the overall health care market. These results have important policy implications. With the introduction of managed care, the health gap between socioeconomic groups will widen and more public subsidies will be needed in order to guarantee the provision of basic health care to the growing uninsured population. The results also bring a new perspective on managed care. Its impact on American health should be analyzed beyond its efficiency implications and more research should be done into its effects on the overall health care market.
    Keywords: managed care; health insurance; uninsured; health economics; safety net;
    Date: 2005–07–12
  14. By: Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
    Abstract: This paper analyses the welfare effects of changes in cross-sectional wage dispersion, using a class of tractable heterogeneous-agent economies. We emphasize a trade-off in the welfare calculation that arises when labour supply is endogenous. On the one hand, as wage uncertainty rises, so does the cost associated with missing insurance markets. On the other hand, greater wage inequality presents opportunities to increase aggregate productivity by concentrating market work among more productive workers. We find that the observed rise in wage dispersion in the United States over the past three decades implies a welfare loss roughly equivalent to a 2.5% decline in lifetime consumption. Assuming Cobb-Douglas preferences, this number is the result of a welfare gain of around 5% from the endogenous increase in productivity coupled with a loss of around 7.5% associated with greater volatility in consumption and leisure.
    Keywords: insurance; labour supply; productivity; wage dispersion; welfare
    JEL: D31 D58 D91 E21 J22 J31
    Date: 2005–08
  15. By: James S. Costain; Michael Reiter
    Abstract: This paper points out an empirical puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, both sticky wages and match-specific productivity shocks help the model reproduce the stylized facts: both make the firm's flow of surplus more procyclical, thus making hiring more procyclical too.
    Keywords: Real business cycles, matching function, unemployment insurance
    JEL: C78 E24 E32 I38 J64
    Date: 2003–06

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