Svetlana Pashchenko, Ponpoje Porapakkarm

Individuals' medical spending has both necessary and discretionary components which are not, however, separately observable. This paper studies ways to improve upon existing public health insurance policies by using a framework where both the discretionary and necessary components of medical spending are explicitly modeled. First, using a simple theoretical framework the paper shows that the key to reducing discretionary medical spending is to introduce a trade-off between non-medical and medical consumption. Next, using a rich quantitative life-cycle model the paper shows that this trade-off can be successfully implemented by introducing an option to substitute public health insurance with cash transfers.

JEL Codes
D52: Incomplete Markets
D91: Intertemporal Consumer Choice; Life Cycle Models and Saving
E21: Macroeconomics: Consumption; Saving; Wealth
H53: National Government Expenditures and Welfare Programs
I13: Health Insurance, Public and Private
I18: Health: Government Policy; Regulation; Public Health
medical spending
health insurance
optimal taxation
life-cycle model
ex-post moral hazard