Health Insurance For Redistribution

Abstract

How can governments use health insurance policy and taxes to advance health equity and reduce income inequality? We derive sufficient statistics formulas for optimal health care subsidies and taxes for a social planner who cares about health inequality, in addition to income inequality. These depend on the planner’s social preferences, income-specific demand elasticities of medical spending, the joint distribution of health, income, and medical spending. We revisit the RAND Health Insurance experiment to estimate the elasticities and we find that low-income individuals have less elastic demand for medical spending than high-income individuals, suggesting that the fiscal externality of public insurance depends on the socioeconomic status of individuals who receive the health care subsidy. We simulate the optimal health insurance policy and tax schedule under egalitarian and Rawlsian welfare objectives over health and income. A planner who places a high weight on the sick, relative to the healthy, chooses to provide a health insurance policy that looks like Medicaid: the optimal health care safety net eligibility threshold is 130% of the Federal Poverty Line, subsidizing 100% of medical spending for low income individuals and 70% for the rest.