Income Risk, Medical Insurance Take Up, and Consumer Bankruptcy

Prior to the implementation of the Affordable Care Act (ACA) in 2010, the large number of uninsured people in the United States was a focus of academic study and policy concern (Gruber 2008). The ACA provided health insurance coverage for about half of these 45 million uninsured American adults. Now, however, steps to eliminate the individual mandates and related mechanisms in the ACA, coupled with all-out efforts to repeal the entire law, again focuses attention on the insurance take up decision.

Recent studies have provided both theoretical and empirical evidence on the importance of personal bankruptcy laws in the insurance take up decision (See for example Mahoney 2015; Sorek and Benjamin 2016). In particular, bankruptcy itself provides an informal (and incomplete) form of insurance against sufficiently large medical bills However, research suggests that the protection given by bankruptcy decreases with the consumer’s wealth level, or level of attachable assets. This, in turn, implies that bankruptcy serves as a substitute for medical insurance primarily for lower income families.

The present paper examines the effects of income (or wealth) risk on consumer insurance take up when bankruptcy protection is available. The “income risk” refers to potential changes in income (or wealth) as determined by employment security and other measures of macroeconomic stability (e.g. stock market uncertainty measure). In the formal analysis the income risk characterized by the income distribution.

We show that a first order deterioration in the distribution of wealth that is not mitigated by limited liability has no effect on take up. On the other hand, a second order increase in the riskiness of the wealth distribution that does not change bankruptcy risk decreases take up by consumers when preferences exhibit prudence, but such a change increases insurance purchase when limited liability is implicated.

These results stand in contrast to the standard findings, such as those in Eeckhoudt et al (1996) who show that, in the absence of bankruptcy risk, both first order deteriorations in wealth, and mean preserving spreads in wealth, increase insurance demand.

References:

Eeckhoudt L., Gollier C., Schlesinger H., 1996. Changes in Background Risk and Risk Taking Behavior. Econometrica 64, 683-689

Gruber J. 2008. Covering the Uninsured in the United States. Journal of Economic Literature 2008, 46:3, 571–606

Mahoney N., 2015. Bankruptcy as implicit health insurance. American Economic Review 105, 710–746

Sorek G., Benjamin D. 2016. Insurance mandates in a model with consumer bankruptcy. Journal of Regulatory Economics 50, 233-250