What Does (Formal) Health Insurance Do, and For Whom?

January 2018
Amy Finkelstein, Neale Mahoney, Matthew J. Notowidigdo

Health insurance confers benefits to the previously uninsured, including improvements in health, reductions in out-of-pocket spending, and reduced medical debt. But because the nominally uninsured pay only a small share of their medical expenses, health insurance also provides substantial transfers to non-recipients (those parties who would otherwise bear the costs of providing uncompensated care to the uninsured). These facts help explain the limited take-up of heavily-subsidized public health insurance, as well as estimates that show that for many recipients the value of formal health insurance coverage is substantially less than the cost to the insurers of providing that coverage. The distributional implications of public subsidies for health insurance depend critically on the ultimate economic incidence of the transfers they deliver to providers of uncompensated care.