The early results from the Oregon Health Insurance Experiment (OHIE), a natural experiment in the state of Oregon that provided previously ineligible poor adults with the chance to lottery for coverage in Medicaid (public insurance for the poor), are astounding.
(The paper is here, a NYT article is here, great blog posts are here). In virtually every measurable domain the authors found very large and significant effects of enrollment on self-reported health status, adherence to recommended care, and even happiness.
Here, I briefly discuss the results pertaining to financial wellbeing.
Nobody disputes that poor people in the United States are more likely to be in poor health and to lack insurance coverage. What is harder to establish empirically is the extent to which a lack of health insurance causes poverty. There are two thorny issues.
First, selection into insurance is non-random. The decision to seek public health insurance is a reflection of many individual differences in health status, not to mention risk-aversion and health behaviors. The presence of these individual differences are very difficult to control for in studies with observational data, leading to severe problems of confounding and attenuated associations between insurance coverage, income, and health.
Second, health status exerts an independent effect on income. The work of James Smith at RAND provides the most clear illustration of this: showing that near-elderly individuals in the Health and Retirement Survey that experienced the onset of a chronic health condition experienced substantial depletions of wealth, leaving them with fewer financial resources in their retirement. The same point has not been as clearly illustrated with prime working age populations in the U.S., but the extrapolation is natural.
The OHIE addresses the problem of selection bias through the wonders of random assignment and provides an experimental manipulation of the insurance channel without independently varying income or health status. We can thus be reassured that significant differences in the study results will reflect the causal effect of health insurance.
Insurance and Wealth: Some Concepts
Access to health insurance should be protective against wealth depletions in three ways (this conceptual division is my own, so let me know if you don’t like it…):
First, health insurance provides better access to care which keeps people healthier, more productive, and better able to work (the health effect).
Second, private insurance helps people to ensure constant utility over time; in effect, taking resources away from their current selves to ensure that their future selves are protected from some unpredictable event (the consumption smoothing effect). Actuarially fair insurance is a good investment because it allows people to pool their risks with other people, so that they don’t need to set aside the full amount of money of worst-case scenario events. Even people that are not able to afford insurance or are not insurable in the private market (the type of people gaining enrollment in the OHIE), may engage in precautionary savings in order to prevent these events, which carries a huge opportunity cost in foregone investment and consumption.
Third, and specific to public insurance coverage, free health care can be a substantial in-kind transfer, like welfare and food stamps (the windfall effect). If a lottery winner had planned to spend some money out of pocket on the doctor’s visits (and most sick people do), then getting health coverage allows her to take that money and divert it either to more consumption or to more investment (like putting money aside for retirement). Because the poor invest very little, I would expect that public insurance mainly raises short-term standard of living. For the near-poor and the middle-class, the ability to make offsetting investments is probably an effective way to prevent the onset of future poverty.
What does OHIE tell us about insurance and poverty?
In the OHIE we have evidence of both windfall effects and consumption smoothing effects. The authors assessed financial wellbeing in two ways — through a survey sent to the treatment and the control group asking about financial problems and using administrative data (specifically, reports from a credit rating agency on bankruptcies, liens, judgments, collections, and delinquencies).
The authors found significant and qualitatively very large effects on self-reported financial problems on all survey measures — including an 18 percentage point reduction on owing money, 15 points on borrowing money or skipping bills to pay other bills. In other words, people are not as inhibited in their consumption (not having to decide as much about whether to eat, pay the utilities, or go to the doctor) and people owe less, meaning that they are doing more to preserve their credit in the future. This is a critical point, I believe, in the insurance to health causal pathway.
The evidence from credit scores underscores this point — although they find little change on global measures of debt and delinquency, they find large effects on being collected on for medical bills (an estimated reduction of $390 in the preferred specification and a reduction of 6 percentage points in any medical collection). Poor credit scores have real consequences for low-income individuals, restricting their access to many conventional financial products and consigning them to very high interest payday loans and high interest credit cards.
Are these effects large enough to lift individuals out of poverty? It is very difficult to say, especially with only one year of follow-up data. Certainly, medical bills are only one of many contributors to poverty, but they are arguably pretty important. It is striking, for example, that fully 28% of all individuals in the control group had an outstanding collection for medical bills. For many, health insurance removes one extra obstacle to financial security, and perhaps for a few it actually does enough to entirely change their financial trajectory.