Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts
Amy Finkelstein, Nathaniel Hendren, Mark Shepard
American Economic Review · 2019 · Volume 109 · Issue 4
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 percent for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, indicating adverse selection into insurance. But across the entire distribution we can observe (approximately the bottom 70 percent of the willingness to pay distribution) enrollees' willingness to pay is always less than half of their own expected costs that they impose on the insurer. As a result, we estimate that take-up will be highly incomplete even with generous subsidies. If enrollee premiums were 25 percent of insurers' average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10 percent of average costs would still leave at least 20 percent uninsured. We briefly consider potential explanations for these findings and their normative implications.
Keywords
Insurance, Insurance Companies, Actuarial Studies, National Government Expenditures and Health, State and Local Government: Health, Education, Welfare, Public Pensions, Health Insurance, Public and Private, Health: Government Policy, Regulation, Public Health
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