Welfare effects of health insurance reform: The role of elastic medical demand

Abstract

Some medical demand is inelastic to price fluctuations, but not all. This paper examines the role of the price elasticity of medical demand on the welfare effects of public health insurance reform. I develop a computational general equilibrium life-cycle model for heterogeneous agents with varying income, wealth, and health that allows for endogenous medical spending. I calibrate the model for the Japanese economy. If medical spending is totally price-inelastic, increasing copayments will improve the welfare of future generations, but harm all current generations, particularly older people with low income or poor health. In contrast, the welfare gain for newborns is significantly greater in the empirically observed situation where medical spending includes some price-elastic components. Moreover, the reform reduces welfare losses for current individuals and may benefit younger generations.