Two of the major issues in the U.S. health care system are the low health insurance coverage rates and the high costs of health care that threaten the solvency of American households and government. Many economists and policymakers call for a comprehensive reform. However, current research in health economics which relies mainly on microeconomic and econometric models falls short in providing a framework suitable for analyzing macroeconomic consequences of health care reforms. We propose a new approach to addresses these issues using macroeconomic modeling techniques. Our research agenda: We integrate the Grossman model (Grossman (1972a)) of health capital into a large scale stochastic life cycle macroeconomic model. Our goal is to develop quantitative macroeconomic models with micro foundations for the demand of health care and health insurance. In order to make our model more convincing, we provide extensive data analysis using the Medical Expenditure Panel Survey (MEPS) and demonstrate that our model is able to generate realistic health spending patterns and insurance take-up ratios over the life-cycle. In addition, the model accounts for important institutional details of the U.S. health care and health insurance sector and is therefore ideal to analyze the effects of various Health Care Reform ideas, including its fiscal and macroeconomic impacts on welfare and growth. This is a contribution to the quantitative macro theory of public health insurance and health care. We analyze the following three reform ideas. Project 1 - Health Savings Accounts: We analyze whether a consumer driven health care plan like the newly established Health Savings Accounts (HSAs) can reduce health care expenditures in the United States and increase the fraction of the population with health insurance. Our preliminary results from numerical simulations indicate that the success of HSAs depends critically on the productivity of health and the annual contribution limit to HSAs. Our results also highlight the importance of accounting for general equilibrium effects which further justifies our macro modeling approach. Project 2 - Universal Health Insurance Vouchers: We investigate a government financed voucher program that allows consumers to buy health insurance in the private insurance market. Our preliminary results suggest that a voucher system would result in full coverage of the U.S. population but also increases the share of GDP spent on health care by 0.6 percent. Simultaneously, we observe a certain amount of crowding out of savings that leads to lower long-run capital stocks. Adverse selection problems disappear completely as insurance is automatically available to the entire population. This leads to improvements in risk pooling and higher levels of health which increases welfare. We find that choosing the right taxation instrument to finance the vouchers will be critical in achieving positive welfare. Project 3 - Public option and Medicare buy-in: In this project we extend the previous model by including Medicaid and the details of the price setting mechanism in private health insurance markets. We then introduce a public option (stand alone program or Medicare buy-in) that will only be available for certain types of households. Low income households receive transfers in order to buy insurance. We analyze the effects on growth, welfare, and the government budget.

Public Health Relevance

This project integrates the Grossman model (Grossman (1972a)) of health capital into large scale dynamic general equilibrium macroeconomic models to study the life cycle behavior of health spending and health insurance. We apply our models to conduct health care policy analysis and provide welfare, growth and fiscal analyses of (i) Health Savings Accounts (HSAs), (ii) Universal Health Insurance Vouchers, and (iii) a Medicare buy-in plan coupled with a public option. We focus on whether these reform ideas are able to lower total U.S. health care spending and the number of individuals without health insurance.

National Institute of Health (NIH)
Agency for Healthcare Research and Quality (AHRQ)
Small Research Grants (R03)
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Health Systems Research (HSR)
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Hagan, Michael
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Towson University
Other Domestic Higher Education
United States
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