Analyzing the Relationship between Health Insurance, Health Costs, and Health Care utilization.(Statistical Data Included)

Introduction and summary In this article, we provide an empirical analysis of the determinants of whether an individual purchases health insurance coverage. We describe the relationship between health insurance, health costs, and health care utilization of the elderly, using data from the Health and Retirement Survey and the Assets and Health Dynamics among the Oldest Old. We show how health costs and health care utilization depend upon access to health insurance for individuals aged 50 and older. Given the public interest in extending health insurance coverage to those who are currently uninsured, it seems worthwhile to better understand why some people do not purchase health insurance. For example, 2000 Democratic presidential candidate Al Gore advocated that individuals aged 55–64 be allowed to “buy in” to Medicare. The idea was that eligible individuals would have to pay for Medicare coverage, but would potentially pay less than the price of privately available insurance. Medicare would potentially be cheaper because of the cost advantages associated with the group coverage that Medicare provides. By understanding the determinants of the health insurance purchase decision, we can better understand how proposed reforms may affect health insurance coverage. First, we investigate the factors influencing a person’s decision to purchase health insurance. A General Accounting Office study found that in 1998, private health insurance premiums for a family of four ranged from $3,000 to $14,000 per year. Although health care coverage can be expensive, very few households are unable to buy private health insurance. Nevertheless, many households choose to be uninsured rather than purchase private health insurance. 1 Therefore, we assume that even low-income households are able to buy basic health insurance. Given that almost all individuals in our data are able to purchase health insurance, the most likely reason that they remain uninsured is that they expect their health costs without insurance to be significantly lower than their health costs with insurance. We test four potential reasons why this might be the case: 1) adverse selection in the insurance market—because insurers cannot distinguish between high-cost and lowcost individuals in a group—leading to potentially prohibitive costs of health insurance for healthy individuals; 2) moral hazard—the idea that if the price of something is low, people use more of it—leading to potentially prohibitive costs of general insurance; 3) potentially prohibitive administrative costs of providing health insurance for private individuals; and 4) many of the uninsured already receive explicit insurance through Medicaid and implicit insurance through hospitals that will treat indigent patients, which may obviate the need for them to purchase additional health insurance. Most studies of the health insurance purchase decision focus on the importance of adverse selection and moral hazard as potential reasons why individuals may not purchase insurance. Our results provide evidence that neither adverse selection nor moral hazard is the key determinant of the health insurance purchase decision. We find no evidence that adverse selection makes private insurance too expensive and only moderate evidence that moral hazard may make private health insurance prohibitively expensive. However, we find significant evidence that high administrative costs drive up the price of private insurance. Moreover, we find a large amount of evidence that the existence of Medicaid and implicit insurance obviates the need for individuals to purchase additional health insurance. This last result suggests that changes