Optimal Health Insurance in the Presence of Risky Health Behaviors

Title:

Optimal Health Insurance in the Presence of Risky Health Behaviors

Number:

15/08

Author(s):

Language:

English

Date:

March 2015

Abstract:

This paper develops a model of risky health behaviors to explore the optimal cost-sharing mechanism in a single provider health insurance system in which everyone contributes the same amount.  In this economy, health insurance provides coverage against controllable health outcomes, and idiosyncratic health shocks. The model is calibrated to the U.S. economy using the Medical Expenditures Panel Survey dataset. I find that the optimal set of policies is the one in which workers pay 30 percent of their health care bills while retirees pay 20 percent. Welfare gains mostly come from the healthy who prefers less generous health insurance policies.

Keywords:

Health insurance, Life cycle model, Medical expenditures

JEL Codes:

D91; E60; I12