Health Risks, Health Technology, and Public Policy

Project Outcomes Statement

The project "Health Risks, Health Technology, and Public Policy" seeks to study the importance of health, health shocks and the health behavior of private households for individual labor market outcomes and the aggregate macro economy, both in terms of long-term economic growth as well as in terms of inequality of health outcomes and labor income. In this project we developed two classes of dynamic economic models in which private households make conscious economic decisions that affect their health.

In the first class of models, households decide how much effort to exert in leading healthy lives, e.g. by exercising, consuming a healthy diet, or abstaining from smoking or drinking (we refer to "exercise" to summarize these activities in what follows. These activities are unpleasant (carry disutility, in technical terms). The key benefit of these actions is that they positively impact the transition of health over time. On average, health deteriorates with age, but these costly health actions slow down this process, and thus lead to higher wages, lower unemployment and thus less risky consumption. We bring this model to micro household income and health data from the Panel Study of Income Dynamics to ensure that the model represents well the individual decisions to exercise, and the subsequent evolution of health.

This model is then employed to evaluate recent policy reforms in the health insurance market and the labor market designed to improve the insurance of consumption against adverse health shock, concretely the Americans with Disabilities Act Amendments Act (ADAAA) on the labor market and the Affordable Care Act (ACA) on the health insurance market. The principal finding of this part of the project, published in 2019 in the Review of Economic Studies as Cole, Kim and Krueger "Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short-Run Insurance Benefits vs. Long-Run Incentive Costs" is that it is optimal to insure 80% of health-related labor income risk. This can be achieved with a highly effective version of the ADAAA. With this policy in place, however, the addition of insuring all prior health conditions through the ACA reduces incentives to exercise to the extent that it leads to a deterioration of the health distribution in the U.S. population in the long run, and, in terms of welfare, these negative incentive effects dominate the short-run consumption insurance gains from the policy.

The second class of models takes a longer-run perspective and seeks to understand the interaction between the slow aging of the population (triggered both by longer life expectancy and lower birth rates), a higher share of incomes being devoted to health goods, and technological progress in the health sector. This theoretical model, and with parameters informed by the data, is then used as an artificial laboratory to evaluate the consequences of fundamental reforms in public social insurance programs, specifically the social security and Medicare programs required to deal with the changing demographic structure in the U.S. The results are contained in the paper by Fernandez-Villaverde, Krueger, Ludwig and Schoen "An Endogenous Growth Model with a Health Sector".