Medical Expenditures over the Life Cycle: Persistent Risks and Insurance

This paper analyzes individuals' medical expenditure risks over the life-cycle and roles of the national health insurance system using nationwide administrative data of health insurance claims (NDB) in Japan. Health shocks are highly persistent and estimated distribution of lifetime medical expenditures varies greatly with the assumed order of persistence. We build a structural life-cycle model for males and females, and single and married households with different labor productivity and assets, and quantify economic and welfare effects of medical expenditure risks and the insurance system. The national health insurance characterized by age-dependent copay rates and progressive out-of-pocket ceilings protects households from expenditure risks well, and has significant effects on their life-cycle savings. Responses to health insurance reform are highly heterogeneous. In response to lower benefits, high-income households turn to self-insurance and increase savings, while low-income households reduce savings and consumption and many of them become recipients of welfare transfers. Welfare effects of such a reform also vary across households and low-income and unhealthy households fare worse than the average. We also show that effects of health insurance reform depend on the generosity of other welfare programs and differ across households.