Health insurance and the consumer bankruptcy decision: Evidence from expansions of Medicaid

Tal Gross*, Matthew J. Notowidigdo

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

137 Scopus citations

Abstract

Anecdotal evidence and several observational studies suggest that out-of-pocket medical costs are pivotal in a large fraction of consumer bankruptcy decisions. In this paper, we assess the contribution of medical costs to household bankruptcy risk by exploiting plausibly exogenous variation in publicly provided health insurance. Using cross-state variation in Medicaid expansions from 1992 to 2004, we find that a 10 percentage point increase in Medicaid eligibility reduces personal bankruptcies by 8%, with no evidence that business bankruptcies are similarly affected. We interpret our findings with a model in which health insurance imperfectly substitutes for other forms of financial protection, and we use the model to present simple calibration results which illustrate how our reduced-form parameter estimate affects the optimal level of health insurance benefits. We conclude with calculations which suggest that out-of-pocket medical costs are pivotal in roughly 26% of personal bankruptcies among low-income households.

Original languageEnglish (US)
Pages (from-to)767-778
Number of pages12
JournalJournal of Public Economics
Volume95
Issue number7-8
DOIs
StatePublished - Aug 2011

Funding

We thank Daron Acemoglu, Josh Angrist, David Autor, Amy Finkelstein, Jonathan Gruber, and seminar participants at MIT, Columbia, and The Federal Reserve Bank of Chicago. We are extremely grateful to Kosali Simon for guidance with all simulated eligibility calculations; to Damon Seils and Kevin Schulman for assistance with the AHA uncompensated care data; and to Richard Hynes for information regarding state exemptions. Notowidigdo thanks the National Institute of Aging (NIA grant number T32-AG000186 ) for financial support.

Keywords

  • Bankruptcy
  • Health insurance
  • Medicaid

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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