Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts

Abstract

We thank Melanie Rucinski for excellent research assistance and Lizi Chen, Ray Kluender, and Martina Uccioli for helping with several calculations. We thank the Massachusetts Health Connector (and particularly Marissa Woltmann and Michael Norton) for assistance in providing and interpreting the CommCare data. We thank our discussant Jeff Clemens for thoughtful and constructive comments. We also thank ABSTRACT How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts' subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low-income adults. As subsidies decline, insurance take-up falls rapidly, dropping about 25%for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, consistent with adverse selection into insurance. But across the entire distribution we can observe -approximately the bottom 70% of the willingness to pay distribution -enrollee willingness to pay is always less than half of own expected costs. As a result, we estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers' average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10% of average costs would still leave at least 20% uninsured. We suggest an important role for uncompensated care for the uninsured in explaining these findings and explore normative implications.

Price-Linked Subsidies and Health Insurance Markups

“…56 54 See discussion in Section 1.3. 55 This result is consistent with the finding of Finkelstein et al (2017) that demand is less than marginal cost for most CommCare enrollees. With E 0 = 0 the implied over-subsidizing of insurance would mean that the additional people insured under fixed subsidies would be a loss to the government, where really that loss is due to an affordable amount that is too high given the externality.…”

“…Absent uncertainty -i.e., with full information about costs, demand, and pricing behavior -the regulator can predict prices and therefore the subsidy amount that will emerge 19 See Currie and Gahvari (2008) for a review of the large literature on rationales for in-kind benefits. 20 Though adverse selection can cause subsidies to be welfare improving (since people on the margin are inefficiently uninsured), both we and others (Finkelstein et al, 2017) find adverse selection is not sufficient to justify subsidies as large as what we see in practice. 21 Indeed, policymakers seem eager to constrain insurer profits with policies like medical loss ratio limits.…”

Losses (and Gains) from Health Reform for Non‐Medicaid Uninsureds

“…A main economic narrative for why willingness to pay for health insurance may be low for those not eligible for public coverage considers the availability of informal or implicit insurance for the uninsured through charity care and bad‐debt forgiveness and, in some cases, formal bankruptcy (Herring, ; Mahoney, ; Finkelstein, Mahoney, and Notowidigdo, forthcoming; see also Zewde, ). Average health care spending by the uninsured is considerably lower than for the insured, and it is well known that the uninsured on average pay for only a relatively small fraction of the care they receive (e.g., Herring, ; Coughlin et al, ).…”

Information Design in Insurance Markets: Selling Peaches in a Market for Lemons

“…12 In practice, health insurance policy is often used as a safety net with the (implicit) aim of reducing inequality and poverty (see, e.g., Finkelstein, Hendren, and Shepard (2017)), but the additional trade-offs involved are beyond the scope of the present paper.…”