Health Insurance, Medical Care, and Health Outcomes: A Model of Elderly Health Dynamics

Health insurance specific to one type of medical care (e.g., prescription drug coverage) creates a change in medical care consumption, beyond standard moral hazard, arising both from the differential cost-sharing among different types of care and the relative effectiveness of different types of care in producing health. We model the choice of supplemental health insurance among Medicare beneficiaries, their medical care demand, and subsequent health outcomes over time using a dynamic model. Parameter estimates obtained with longitudinal individual-level data from the 1992-2001 MCBS allow us to simulate behavior under different drug coverage scenarios. Prescription drug coverage increases drug expenditures by 7 percent to 27 percent over a five-year period, depending on the source of coverage. While mortality rates fall slightly, the survivors have poorer health, leading to higher total medical expenditures. This research is funded by the National Institute on Aging Grant Number R01-AG16600. We appreciate comments from David Blau, Richard Hirth, Xin Li, Tom Mroz, Betsy Sleath, Sally Stearns, Morris Weinberger, and seminar and conference participants at the University of North Carolina at Chapel Hill, Michigan State University, the University of Wisconsin, Yale University, the 4th World Congress of the international Health Economics Association, and the 15th Annual Health Economics Conference. Comments are welcome at [email protected], donna [email protected], or edward [email protected].