The Effect of the Affordable Care Act on the Labor Supply, Savings, and Social Security of Older Americans

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1 The Effect of the Affordable Care Act on the Labor Supply, Savings, and Social Security of Older Americans Eric French University College London Hans-Martin von Gaudecker University of Bonn John Bailey Jones SUNY-Albany 17 th Annual Joint Meeting of the Retirement Research Consortium August 6-7, 2015 Washington, DC The NBER Retirement Research Center, the Center for Retirement Research at Boston College (CRR), and the University of Michigan Retirement Research Center (MRRC) gratefully acknowledge financial support from the Social Security Administration (SSA) for this conference. The findings and conclusions are solely those of the authors and do not represent the views of SSA, any agency of the federal government, the NBER Retirement Research Center, CRR, or MRRC. Author s affiliations are UCL, University of Bonn and SUNY-Albany. The authors thank the MRRC for financial support.

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3 The Affordable Care Act (ACA) is the most significant reform to the U.S. health care sector since the 1960s. The ACA's provisions fall into four main categories: (1) an expansion of Medicaid; (2) an overhaul of private non-group insurance, including community rating, coverage standards, the introduction of exchanges, subsidies, and purchase mandates; (3) a mandate for large employers to offer health insurance coverage, and subsidies for smaller employers; (4) miscellaneous provisions including reforms to coverage standards, the tax code, and the management of Medicare. In this paper, we assess the impact of the Medicaid and private non-group insurance provisions of the ACA on the labor supply and saving of Americans ages 50 and older. Using an estimated structural model of worker behavior, we focus on key provisions of the ACA that are likely to affect older workers. We consider the following two sets of provisions. First, the ACA expands Medicaid eligibility for low-income households younger than 65. Medicaid is a means-tested health insurance program provided jointly by the Federal and state governments. Prior to the ACA, low-income households nearing retirement qualified for Medicaid only if they were disabled. Moreover, under the ACA Medicaid applicants no longer face an asset test, meaning that they can qualify for Medicaid even if they hold significant wealth. The ability to carry wealth into retirement should make Medicaid more attractive for older workers. Overall, the Medicaid expansion could either increase or reduce labor supply by the elderly. Most likely, fewer people will work, as they can now qualify for Medicaid if they retire. The second set of provisions involves non-group insurance. The ACA establishes exchanges where households without group coverage can purchase insurance. The policies offered on these exchanges must meet coverage standards, and they must be community-rated, i.e., insurers cannot price-discriminate by health. The ACA also requires uninsured households ineligible for Medicaid to purchase insurance, provides tax subsidies for most purchases, and levies penalties on those not complying. These changes should significantly alter the customer base and actuarial costs in the non-group market. Although the subsidies will allow most households to purchase non-group insurance more cheaply, healthy and/or lightly subsidized individuals may see their premiums rise. Because many workers lose their employer-provided insurance after they leave their job (and the COBRA buy-in period expires), changes in the price of non-group insurance may change their retirement decisions. Because most people will be able

4 to buy non-group health insurance more cheaply, early retirement will probably increase. Balancing against this, the subsidies provided under the ACA will allow uninsured low-income workers to purchase cheap insurance in the non-group market. Prior to the ACA these people may have used default on medical bills as a substitute for health insurance. However, default is a good substitute for insurance only when income and assets are low. Acquiring health insurance may encourage these workers to work and save more. Because the ACA s insurance subsidies decrease with income, they also generate work disincentives. Like most means-tested transfers, the ACA subsidies effectively impose a tax on income. Our goal is to assess the quantitative importance of these ACA reforms. To do this, we extend the structural labor supply and retirement model in French and Jones (Econometrica, 2011) to account for these reforms. We construct a life-cycle model of labor supply that not only accounts for medical expense uncertainty and health insurance, but also has a saving decision. Individuals within the model can choose to work and how many hours to work. We include the coverage provided by means-tested social insurance, as well as the option to not pay medical bills if indigent, to account for the fact that Medicaid and default provides a substitute for other forms of health insurance. Moreover, individuals who are 62 or older can claim Social Security benefits, allowing us to consider how health care reforms might affect Social Security claiming behavior. We extend the French and Jones framework by modeling medical spending and insurance in much more detail. We model explicitly how the insurance premia and coinsurance rates that households face depend on their demographic characteristics and on the types of health insurance they hold. We estimate our model of medical payments using data from the Medical Expenditure Panel Survey (MEPS). The MEPS contains high quality data on total medical expenditures and their distribution among payers: out-of-pocket, employer, private insurance, the government, and others. The MEPS allows us to capture key facts about the medical spending of the uninsured as well as insured over the period. For example, the uninsured tend to consume fewer medical resources than other groups. Furthermore, over 50% of all medical resources consumed by the uninsured are not paid out of pocket, but are instead paid for by the veteran s administration, workers compensation, and other payors. For the privately insured, we can

5 estimate the average deductible and coinsurance rate paid. We find that a typical private health insurance plan is well represented by a deductible of $3,000 and a coinsurance rate above that of 16%. Furthermore, we can estimate insurance premia, and how insurance premia respond to expected medical spending. We find that for every dollar in expected medical spending, insurance premia for the privately insured rise by 12 cents, and for those covered by employer provided insurance they do not rise at all. We then model how the likely costs of medical insurance would change after the Affordable Care Act. Using the medical spending data from the MEPS as inputs, we estimate our dynamic programming model using the Method of Simulated Moments. In particular, we find the model parameters that yield the closest match between data simulated from the model and data on assets and labor supply taken from the Health and Retirement Study (HRS). We find that the model fits the data well with reasonable parameters. Upon estimating the model, we conduct counterfactual experiments, where we modify the premia and co-insurance rates, net of subsidies and penalties, which households face. We consider the ACA s provisions for Medicaid and private non-group insurance, separately and together. Understanding how access to health insurance coverage affects labor supply is of central importance. Virtually everyone becomes eligible for Medicare, a public health insurance for older Americans, at age 65. However, the Social Security system and pensions also provide retirement incentives at age 65. This makes it difficult to determine whether the high job exit rates observed at age 65 are due to Medicare, Social Security, or pensions. One way we address this problem is to exploit variation in employer-provided health insurance. Some individuals receive employer-provided health insurance only while they work, so that their coverage is tied to their job. Other individuals have retiree coverage, and receive employer-provided health insurance even if they retire. If workers value access to health insurance, those with retiree coverage should be more willing to retire before age 65. The HRS data show that individuals with retiree coverage tend to retire about a half year earlier than individuals with tied coverage. This suggests that employer-provided health insurance is a determinant of retirement. Because our model is able to matching the joint variation in health insurance and labor supply found in the HRS, it should be able to predict the changes induced by the ACA.

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