Medical expenditures over the life-cycle: persistent risks and insurance

This paper builds a life-cycle model of single and married households and evaluates the roles of the national health insurance system. We use the administrative data on nationwide health insurance claims in Japan to analyze medical expenditure risks and calibrate the model with the stochastic process that varies by age and gender. Economic and welfare effects of health insurance reform depend on household income levels and generosity of the welfare program. Without health insurance, high-income households turn to self-insurance, significantly increasing aggregate savings. Low-income households, especially low-skilled single men and women, reduce savings and many of them become welfare recipients. Raising copayment rates for the elderly increases household savings, but depletes wealth of low-income households and leads to a rise in the number of welfare recipients.