Social health insurance: A quantitative exploration

Abstract

We quantitatively explore the economic effects of expanding the public and private components of the US health insurance system. Our analysis uses an overlapping generations model that comprises health risk, labor market risk, and key features of the US health insurance system such as private individual health insurance (IHI), employer sponsored group health insurance (GHI), means-tested public health insurance for low income individuals (Medicaid), and public health insurance for retired individuals (Medicare). Our simulations show that expanding Medicare to all workers—aka universal public health insurance (UPHI)—improves aggregate welfare if the coinsurance rate of UPHI is set to a higher level than the current Medicare coinsurance rate. There exists an optimal coinsurance rate that balances the incentive and insurance trade-off of the UPHI system and maximizes welfare outcomes. Allowing private health insurance to coexist with UPHI plans, lowers the overall fiscal cost of UPHI and results in larger welfare gains. Tax financing instruments matter for welfare outcomes. Using a consumption tax to finance the expansion of public health insurance leads to fewer distortions and improved welfare outcomes compared to income or payroll taxes. If, under the current US system, the government mandates GHI offers to become available to all workers, welfare gains can also be achieved.