Serdar Ozkan
Job Market Candidate
Job Market Paper: Income Differences and Health Care Expenditures over the Life Cycle
Abstract
This paper studies differences in the lifetime profile of health care usage between low- and high-income groups.
Using data from the Medical Expenditure Panel Survey (MEPS) I find that early in life the rich spend significantly
more on health care, whereas midway through life until old age the medical spending of the poor exceeds dramatically
that of the rich. In addition, the distribution of the poor's medical expenditures
has fatter left and right tails. To account for these facts, I develop and estimate a life-cycle model
of two distinct types of health capital: preventive and physical. Physical health capital determines survival probabilities,
whereas preventive health capital governs the distribution of shocks to physical health capital, thereby controlling the
expected lifetime. Moreover, I incorporate important features of the US health care system such as private health insurance,
Medicaid, and Medicare. In the model, optimal expected lifetime is longer for the rich which can only be achieved by larger
investment in preventive health capital. Therefore, as they age, their health shocks grow milder compared to the poor, and
in turn they incur lower curative medical expenditures. Public
insurance in old age amplifies this mechanism by hampering the incentives of the poor to invest in preventive health capital.
I use the model to examine a counterfactual economy with universal health insurance in which 75% of the preventive medical
spending is reimbursed on top of the existing coverage. My results suggest that policies encouraging the use of health care
by the poor early in life have significant welfare gains, even when fully accounting for the increase in taxes
required to pay for them.