An Ounce of Prevention at Half Price: Evaluating a Subsidy on Health Investments

This paper examines how investments in health, through spending on preventive care, affect subsequent spending on medical care among the retired population. Augmenting a traditional dynamic consumption-savings model with two medical care goods, I estimate a structural life cycle model using data on single retired Americans from the Health and Retirement Study; I then conduct policy counterfactuals to ascertain the effect of a subsidy on preventive care on health and fiscal outcomes. A narrowly targeted subsidy improves longevity by 0.76 months at a public cost of $760 per capita, but does not reduce lifetime demand for medical care. JEL Classification: D14, D91, I13