Reducing Medical Spending of the Publicly Insured: The Case for a Cash-Out Option
50 Pages Posted: 28 Dec 2016 Last revised: 5 Nov 2018
Date Written: October 28, 2018
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 non-medical 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.
Keywords: medical spending, health insurance, optimal taxation, life-cycle models, ex-post moral hazard
JEL Classification: D52, D91, E21, H53, I13, I18
Suggested Citation: Suggested Citation