Individuals' medical spending has both necessary and discretionary components, which are not, however, separately observable. This paper studies ways to improve upon existing public health insurance policies by using a framework where both the discretionary and necessary components of medical spending are explicitly modeled. First, using a simple theoretical framework, the paper shows that the key to reducing discretionary medical spending is to introduce a trade-off between nonmedical and medical consumption. Next, using a rich quantitative life-cycle model, the paper shows that this trade-off can be successfully implemented by introducing an option to substitute public health insurance with cash transfers.
Pashchenko, Svetlana, and Ponpoje Porapakkarm.
"Reducing Medical Spending of the Publicly Insured: The Case for a Cash-out Option."
American Economic Journal: Economic Policy,
Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Insurance; Insurance Companies; Actuarial Studies
National Government Expenditures and Health
Health Insurance, Public and Private
Health: Government Policy; Regulation; Public Health
Welfare, Well-Being, and Poverty: Government Programs; Provision and Effects of Welfare Programs