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Preventive vs. Curative Medicine: A Macroeconomic Analysis of Health Care over the Life Cycle

This paper studies differences in health care usage and health outcomes between low- and high-income individuals. Using data from the Medical Expenditure Panel Survey (MEPS) I find that early in life the rich spend significantly more on health care, whereas from middle to very old age medical spending of the poor surpasses that of the rich by 25%. In addition, low-income individuals are less likely to incur any medical expenditures in a given year, yet, when they do, their expenses are more likely to be extreme. To account for these facts, I develop and estimate a life-cycle model of two types of health capital: physical and preventive. Physical health capital determines survival probabilities, whereas preventive health capital governs the endogenous distribution of shocks to physical health capital, thereby controlling the life expectancy. Moreover, I incorporate important features of the U.S. health care system such as private health insurance, Medicaid, and Medicare. In the model, from the very early ages the rich spend more in preventive health to expand their life expectancy, which leads to milder health shocks (and lower curative medical expenditures) for them in old age compared to the poor. Public insurance—which is designed to insure large expenditures—amplifies these differences by hampering the incentives of the poor to invest in preventive health. I use the model to examine a counterfactual economy with universal health insurance in which 75% of preventive medical spending is reimbursed. My results suggest that policies encouraging the use of health care by the poor early in life produce significant welfare gains, even when fully accounting for the increase in taxes required to pay for them.

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