Health Insurance Optimal Ins (Theory) Public Policy

How can we tell if health insurance is affordable?

Last week I reviewed a paper the sought to understand why people don’t buy health insurance. A key finding was that there health insurance purchase was correlated with income, but not perfectly. One reason was that the cost of other goods–especially housing–affected individuals ability to purchase insurance. The paper was getting at whether health insurance was affordable for individuals at different income levels.

But how do we define whether health insurance is affordable? A paper by Bundorf and Pauly (NBER, JHE) list some potential ways of defining affordability.

  • Behavioral definition. Look at the share of individuals who purchase health insurance at different income levels. At the income level where 50% of people purchase health insurance, it could be deemed affordable for people of that income level. Other percentage threshold could of course be used. In practice, however, one would need to look at a group of similar people to arrive at the behavioral definition (e.g., the price of family vs. single insurance or employer-based vs. individual insurance will vary).
  • Normative definition. The normative definition assumes that people must have at least $X to spend on non-health goods (e.g., food, clothes, shelter). Thus, health insurance is affordable if the amount of money left over after these other needs are met is sufficient to purchase health insurance. This is the logic used to justify the Medicaid eligibility requirements based on a multiple of the federal poverty line (FPL). The Medicaid program aims to provide health insurance to those who could not otherwise afford it. For adults in 34 states, Medicaid eligibility is ≥138% of FPL; the program is even more generous for pregnant women and children (CHIP).

So using these definitions, are most people who do not have insurance not able to afford it? The answer is ‘no’, but the magnitude of this ‘no’ depends on how we define affordable.

…using either the normative or behavioral definition, we find that a significant portion of the uninsured could have afforded coverage, although the magnitude of the estimate varies considerably depending on the choice of the normative parameters in each model…Identifying health insurance as affordable to those with incomes at or above
1.75 times the poverty line, we find that 51% of the uninsured could have afforded coverage. Using the behavioral model with the affordability threshold set at 0.6 and including financial resources, premium proxies, and geographic indicators, a similar proportion, 0.50, of the uninsured are identified as able to afford coverage….depending on the definition, health insurance was affordable to between one-quarter and three-quarters of the uninsured in 2000

The authors also use a variety of other specifications including different affordability thresholds and methodological approaches and still find that between 1/4 and 3/4 of uninsured individuals in 2000 could have afforded health insurance.

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