National Health Insurance and precautionary saving: evidence from Taiwan

Transcription

1 Journl of Public Economics 87 (003) locte/ econbse Ntionl Helth Insurnce nd precutionry sving: evidence from Tiwn b c, * Shin-Yi Chou, Jin-Tn Liu, Jmes K. Hmmitt Deprtment of Humnities nd Socil Sciences, New Jersey Institute of Technology, Newrk NJ nd Ntionl Bureu of Economic Reserch, New York NY, USA b Deprtment of Economics, Ntionl Tiwn University, Tipei, Tiwn c Deprtment of Helth Policy nd Mngement nd Center for Risk Anlysis, Hrvrd School of Public Helth, 718 Huntington Avenue, Boston, MA , USA Received 7 Mrch 001; received in revised form 7 November 001; ccepted 7 November 001 Abstrct By reducing uncertinty bout future medicl expenses, comprehensive helth insurnce cn reduce households precutionry sving. We exmine this effect using Tiwn micro-dt spnning the 1995 introduction of Ntionl Helth Insurnce. The effects of Ntionl Helth Insurnce re identified using employment-bsed vrition in prior insurnce coverge. Replcement of the households prior insurnce coverge with Ntionl Helth Insurnce is exogenous to the household, so our estimtes re not subject to selection bis. Compred with the preceding government insurnce progrms, Ntionl Helth Insurnce reduced sving by n verge of % with the lrgest effects for households with the smllest sving. 00 Elsevier B.V. All rights reserved. Keywords: Ntionl Helth Insurnce; Precutionry sving; Prudence JEL clssifiction: D1; H4; I1 1. Introduction The possibility of economic dversity leds households to sve more nd consume less thn they would otherwise. Becuse helth expenditures cn be lrge *Corresponding uthor. Tel.: ; fx: E-mil ddress: jkh@hsph.hrvrd.edu (J.K. Hmmitt) / 0/ $ see front mtter 00 Elsevier B.V. All rights reserved. doi: /s (01)0005-5

2 1874 S.-Y. Chou et l. / Journl of Public Economics 87 (003) reltive to income, persistent nd generlly increse with ge, they mke significnt contribution to households uncertinty bout its future economic 1 circumstnces. The introduction of comprehensive helth insurnce, by reducing uncertinty bout the mgnitude of future out-of-pocket helth expenditures, cn substntilly reduce the demnd for precutionry sving nd so increse current consumption. We investigte this effect by studying the 1995 introduction of Ntionl Helth Insurnce (NHI) in Tiwn. Numerous theoreticl studies hve exmined the precutionry-sving motive when future income or expenses re uncertin (see e.g. Lelnd, 1968; Sndmo, 1970; Dreze ` nd Modiglini, 197; Skinner, 1988; Zeldes, 1989,b; Kimbll, 1990; Cbllero, 1990, 1991; Deton, 1991). Most empiricl studies hve focused on uncertin future income nd provide mixed evidence of precutionry sving. There hve been few empiricl studies testing the impct of socil helth insurnce on sving behvior. We use nturl experiment ssocited with the cretion of NHI to exmine the effect of reduction in uncertinty bout future medicl expenses on household sving nd consumption behviors. Before the implementtion of NHI, helth insurnce in Tiwn hd been provided through employment-bsed government progrms. A mjority of the working popultion hd lmost complete coverge under Lbor Insurnce or Government Employees Insurnce. Two mjor differences between these government-sponsored policies enble us to exploit the vrition with respect to uncertin helth expenditures to identify the effect of NHI on sving. NHI covers workers fter retirement nd fmily members. Prior to NHI, only government employees received these benefits. As result, the introduction of comprehensive coverge under NHI hd smller effect on governmentemployed thn on other households. We estimte the effect of NHI on precutionry sving using difference-indifferences pproch. We compre the chnge in sving for tretment group with the chnge in sving for control group. The chnge in sving for the control group ccounts for ny systemtic structurl chnge while the experimentl group s chnge reflects both the systemtic structurl chnge nd the impct of the policy intervention. Prior to NHI, household could obtin helth insurnce for ll household members if either the husbnd or wife worked in the government sector. Accordingly, we define tretment nd control groups bsed on the husbnd s nd wife s joint employment sttus. 1 In the US, totl helth-cre spending ws equivlent to 16% of disposble personl income in 1997 (Bureu of Economic Anlysis dt). In Tiwn, medicl cre nd helth expenses were roughly 7.6% of household disposble income in 1998 (Survey of Fmily Income nd Expenditure dt). Feenberg nd Skinner (1994) hve shown tht medicl expenses re persistent, so tht modest nnul helth costs cn grdully deplete fmily s resources. With the exception of supplementry coverge for selected conditions such s cncer or ccidents, there is virtully no privte helth insurnce in Tiwn. For detiled description of helth insurnce in Tiwn, see Pebody et l. (1995) nd Ching (1997).

3 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Our dt re from the Survey of Fmily Income nd Expenditure, ntionlly representtive survey tht collects detiled informtion on household income nd consumption expenditures s well s demogrphic nd employment sttus for ech 3 household member. The chrcteristics of helth-insurnce progrms in Tiwn nd these dt llow us to improve previous studies in three spects. First, our estimtes re not subject to selection bis, since Ntionl Helth Insurnce covers everyone nd ws inugurted by the Tiwn government. Second, NHI is not n sset-bsed, mens-tested progrm. Thus, the empiricl nlysis offers direct test of the impct of NHI on precutionry sving, without n dditionl negtive effect rising from mens testing. Third, we re ble to exploit vrition cross different insurnce policies before the implementtion of NHI to identify the effect of NHI on sving nd consumption behviors. Our empiricl results support the premise tht the precutionry motive is n importnt determinnt of household sving nd consumption behviors. We find tht government provision of universl helth insurnce cn cuse considerble reduction in privte sving: Compred with the preceding Lbor Insurnce, implementtion of Ntionl Helth Insurnce lowers verge sving by % nd rises verge consumption expenditures by.9 3.6%. The effect on sving is strongest for households with the smllest sving, which is consistent with the hypothesis tht prudence (the sensitivity of precutionry sving to risk) declines with welth (Kimbll, 1990). The pper proceeds s follows. Section provides some bckground on helth insurnce in Tiwn nd brief review of the relted literture. Section 3 outlines theoreticl frmework. Section 4 presents the dt. Section 5 describes the empiricl strtegy nd empiricl specifiction. Section 6 reports the estimtion results nd Section 7 concludes.. Bckground.1. Ntionl Helth Insurnce in Tiwn Tiwn inugurted NHI in Mrch Since implementtion, NHI hs incresed the insured frction of the popultion from 57% in 1994 to 97% in Prior to implementtion, there were three mjor helth-insurnce progrms Lbor Insurnce, Government Employees Insurnce, nd Frmers Helth Insurnce. An individul could obtin helth insurnce only through one of these government- 4 sponsored helth plns, which were tied to his or her employment sttus. Although most of the working popultion ws covered by these three progrms, 3 For detiled description of the dt, see Deton nd Pxson (1994,b). 4 After 1990, the government provided helth insurnce to low-income households, but this progrm covered less thn 1% of the popultion.

4 1876 S.-Y. Chou et l. / Journl of Public Economics 87 (003) lmost hlf the totl popultion ws uninsured becuse only Government Employees Insurnce offered coverge to the worker s children, spouse nd prents. In 199, 37% of the popultion ws covered under Lbor Insurnce, 8.% under Government Employees Insurnce, nd 8.% under Frmers Helth Insurnce (Pebody et l., 1995; Ching, 1997). The 47% of the popultion who were not covered were mostly children, the elderly nd housewives. Lbor Insurnce ws implemented in 1950 nd initilly designed to cover industril workers employed in public or privte fctories. Under the 1970 Lbor Insurnce Sttute, employers of journlistic, culturl, nd non-profit orgniztions, nd coopertive enterprises with five or more employees were required to insure ll workers between the ges of 15 nd 60 yers. In 1988, Lbor Insurnce ws extended to cover government employees who were not eligible for Government Employees Insurnce nd to privte-school techers nd employees. Members of n occuptionl union who hd no regulr employer or who were self-employed were lso insured under the progrm. The premium for Lbor Insurnce ws 6 8% of monthly-insured slry, 80% of which ws pid by the employer nd 0% by the worker. Lbor Insurnce did not provide coverge to workers or employees fmily members. As implemented in 1958, Government Employees Insurnce provided mndtory coverge for government employees. The premium rte ws 3 5% of the employee s slry, of which 35% ws pid by the employee nd 65% by the government. Eligibility for optionl coverge ws extended to retired government employees in 1965, nd to spouses, prents nd children of government employees in 198, 1989 nd 199, respectively. The Frmers Helth Insurnce progrm, estblished in 1985, covered ll frmers. In 1989, coverge ws extended to lmost ll fmily members of griculture households. We exclude griculture households from our smple, since the mjor form of their svings is in non-liquid ssets such s lnd. In order to eliminte potentil impcts of Frmers Helth Insurnce on femle lbor supply, we lso limit our study period to yers beginning with In contrst to previous insurnce progrms, NHI covers ll members of the popultion. The premium pyble by the insured nd his or her dependents depends on the insured pyroll-relted mount nd the premium rte of the insured. The mximum premium rte is 6%, which is shred by the employee, 5 employer nd government. Before implementtion of NHI, ll the socil insurnce progrms provided similr benefits, including outptient visits, inptient cre nd prescription drugs. Approximtely 85% of hospitls nd 70% of clinics contrcted with the socil insurnce progrms in Two yers lter, fter implementtion of NHI, the proportion of contrcting institutions incresed to bout 96.5% of hospitls nd 5 In 1996, the premium pyble rnged from to 5% of totl household income.

5 S.-Y. Chou et l. / Journl of Public Economics 87 (003) % of clinics. NHI coverge lso extends to severe illnesses nd home helth cre (Cheng nd Ching, 1997). For outptient visits, the out-of-pocket expenditure rnges from NT$80 to NT$150. For hospitliztion, the co-pyment rnges from 5 to 30% for both cute nd chronic cre, depending on the hospitl length of sty. In the cse of mjor illness nd injury, no co-pyment is required. Tble 1 summrizes the differences mong Government Employees Insurnce, Lbor Insurnce nd Ntionl Helth Insurnce. The diverse helth-insurnce progrms provide n opportunity to study the effect of helth insurnce on precutionry sving ginst unexpected helth expenditures. The implementtion of Ntionl Helth Insurnce reduces the risk of ctstrophic helth expenditures nd consequently wekens the precutionry-sving motive. We expect tht NHI hd smller impct on government-employed households precutionry sving since their prior coverge ws more generous thn tht of other households, nd so NHI hd less effect in reducing uncertinty bout medicl expenditures. By exploiting the vrition in uncertinty with respect to helth expenditures before the implementtion of NHI, we re ble to identify the effect of ntionl helth insurnce on households precutionry-sving motives. Note tht the vrition is creted by series of lws implemented t the ntionl level nd does Tble 1 Comprison of helth insurnce progrms in Tiwn Government Employees Insurnce Lbor Insurnce Ntionl Helth Insurnce Yer of implementtion Generl provision Mternity benefit Mternity benefit Mternity benefit Injury nd sickness benefit Injury nd sickness benefit Injury nd sickness benefit Disbility benefit Disbility benefit Unemployment benefit Unemployment benefit Old-ge benefit Old-ge benefit Deth benefit Deth benefit Insured persons Government employees Workers bove 15 yers Six ctegories (see notes) (civil servnts) nd below 60 yers of ge Dependents of the insured Spouse 198 No 1995 Prents 1989 No 1995 Children 199 No 1995 Retired employees 1985 No Notes: The insured of NHI re clssified into the following six ctegories: (1) Civil servnts; employees of publicly or privtely owned enterprises or institutions; employees employed by prticulr employers; employers or self-employed owners of business; independently prcticing professionls nd technicins. () Members of n occuptionl union; semen serving on foreign vessels. (3) Members of the Frmers Assocition, the Irrigtion Assocition nd the Fishers Assocition. (4) Dependents of voluntry militry officers, non-commissioned officers or servicemen. (5) Members of household of low-income fmilies. (6) Veterns. (Ntionl Helth Insurnce Act, Chpter II, Article 8).

6 1878 S.-Y. Chou et l. / Journl of Public Economics 87 (003) not rise from differences in household behviors. Moreover, the 1995 introduction of NHI creted shrp chnge in helth-insurnce conditions, nd there were no other mjor chnges in lbor policies during the period we nlyze. This nturl experiment llows us to study precutionry sving without selection bis, s discussed in the next section... Relted literture The theoreticl condition under which n increse in uninsurble risk leds to more precutionry sving ws first derived by Lelnd (1968) nd further nlyzed by Sndmo (1970) nd Dreze ` nd Modiglini (197). Kimbll (1990) defined the concept of prudence nd showed tht prudent individul will engge in precutionry sving. The theory of precutionry sving ws further shrpened by numerous recent studies (Skinner, 1988; Kotlikoff, 1989; Zeldes, 1989,b; 6 Cbllero, 1990, 1991; Deton, 1991; Hubbrd et l., 1994,b, 1995). Most empiricl studies emphsize income uncertinty nd provide mixed evidence of precutionry sving. Using subjective or objective risk mesures, Skinner (1988), Guiso et l. (199), nd Dynn (1993) found no support for the precutionry motive, while other studies found more support for the precutionry view (Crroll nd Smwick, 1998; Kzrosin, 1997). Zeldes (1989) confirmed the importnce of precutionry-sving motives using numericl simultion. Severl studies hve considered the effects of helth nd other types of insurnce on sving. Plumbo (1999) found tht uncertin out-of-pocket medicl expenses represent n importnt motive for precutionry sving mong the elderly. Bsed on simultion results, Kotlikoff (1989) showed tht sving for self-pyment exceeds tht under cturilly fir insurnce, while sving is smllest for Medicid (which is n sset-bsed, mens-tested socil insurnce progrm). Recent theoreticl work by Hubbrd et l. (1995) suggested tht mens- nd sset-tested socil insurnce progrms crete significnt disincentive for sving. Powers (1998) nd Gruber nd Yelowitz (1999) confirmed this prediction by showing strong positive ssocition between socil insurnce eligibility nd consumption expenditures. Severl studies lso found positive correltion between socil helth insurnce (i.e. workers compenstion, unemployment insurnce) nd sving or welth holdings (e.g. Kntor nd Fishbck, 1996; Engen nd Gruber, 001; Frley nd Wilensky, 1985). Only Strr-McCluer (1996) found positive effect of helth-insurnce coverge on welth holdings, even fter controlling for the potentil selection effect. The mixed empiricl findings leve open the question of the effect of helth insurnce on sving behvior. Our study offers severl dvntges in exmining 6 See Deton (199) nd Browning nd Lusrdi (1996) for reviews of this literture.

7 S.-Y. Chou et l. / Journl of Public Economics 87 (003) the impct of helth insurnce on precutionry sving. First, the Ntionl Helth Insurnce introduced in Tiwn in 1995 represents n exogenous fctor; therefore, we do not confront the selection problems which re likely to cuse estimtion 7 bises in most previous studies. For exmple, Skinner (1988) used occuptionl dummies to clssify households in different risk ctegories nd did not find ny significnt correltion between ernings uncertinty nd precutionry sving. These proxies for risk re lmost inevitbly correlted with observble or unobservble ttributes which re correlted with sving behvior s well. A similr concern csts doubt on Strr-McCluer s (1996) finding tht helth insurnce is positively ssocited with welth holdings. Those individuls who re highly risk verse re more likely to both purchse privte helth insurnce nd ccumulte welth for self-insurnce. As result, it is difficult to distinguish the effect of helth insurnce per se. Second, the NHI in Tiwn is not mens-tested. Thus, our study offers direct test of how sving is ffected by the reduction of helth expenditure uncertinty. As rgued by Hubbrd et l. (1995), sset-bsed, mens-tested socil insurnce usully hs two effects on sving. Insurnce reduces the risk of unexpected medicl expenditures nd wekens the precutionry-sving motive. In ddition, some households will spend-down their welth in order to become eligible for mens-tested socil helth insurnce, such s Medicid. Consequently, it is difficult to distinguish whether low sving rte is ttributble to the reduction of precutionry sving or the effect of the mens test. Third, s described in the previous section, we cn exploit the vrition with respect to prior helth insurnce to identify the pure effect of NHI on households precutionry sving. It is usully difficult to obtin dt sets tht detil type of helth-insurnce coverge together with informtion bout consumption nd sving. We re ble to identify the helth-insurnce policies through the household heds nd their spouses employment sttus. Furthermore, there is usully little or no vrition in the benefits households expect to receive, if the benefits of socil insurnce progrms re set by the government. Vrious types of helth-insurnce progrms provided by the government in Tiwn before NHI enble us to exploit the vrition cross employment sttus. 7 There is potentil selection effect if, prior to NHI, workers choices between government nd privte-sector jobs were significntly ffected by differences in insurnce coverge. This effect would bis downwrd our estimtes of the effect of NHI on precutionry sving, if households tht chose privte sector jobs re less concerned bout uncertin future helth expenditures thn re households tht chose government jobs. In principle, one could ccount for the possible endogeneity of household hed s employment sttus due to joint job nd helth insurnce decisions by estimting employment sttus using instrumentl vribles. We do not pursue this becuse of lck of suitble instruments in our cross-sectionl dt. In ddition, becuse the survey does not provide informtion on job tenure, we do not know when the household mkes its employment decision.

8 1880 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Conceptul frmework The implementtion of NHI reduces household s uncertinty bout future helth expenditures. If households re prudent, the reduction in risk will decrese sving nd increse consumption (Kimbll, 1990). There is, in ddition, potentil income effect. Although NHI is offered t cturilly fir rtes (i.e. the premium equls the expected medicl expense), employees of government, publicly nd privtely owned enterprises or institutions, nd of certin other employers ber only 30 40% of the premium. Unless there re compensting wge reductions, NHI increses expected income net of medicl expenses for these households. This income effect will increse both consumption nd sving. It cn be distinguished from the risk effect which lso increses consumption, but decreses sving. We expect the income effect to be trivil s the premium is only few percent of household expenditures. To understnd how uncertin helth expenditures cn influence sving, we consider stochstic life-cycle model, following Blnchrd nd Fischer (1989) nd Deton (199). The household is ssumed to be uncertin bout future medicl expenditures. In ech period the household incurs out-of-pocket helth expenditures M t. In period t, fter observing M t, the household chooses consump- tion C nd future consumption hc,...,c j to mximize the expected vlue t t11 T1 of its dditively time-seprble Von Neumnn Morgenstern utility subject to the budget constrint. Such dynmic decision problems under uncertinty yield no closed-form solution for optiml consumption except under specific utility functions. For simplicity, we ssume tht the utility function exhibits constnt bsolute risk version (nd thus constnt bsolute prudence), following Kimbll nd Mnkiw (1989), Cbllero (1990) nd Weil (1993). We further simplify by ssuming the discount rte, r, nd interest rte, r, re both equl to zero. Thus, t time zero, the household mximizes F G T1 1 E OS] Dexp(C t)ui 0 (1) t50 subject to At11 5 At1 Yt Mt C t, nd M,A $ 0, t t ;t, M 5 M 1, N(0, s ). t t1 t t Helth cre expenditure is modeled s rndom wlk, with normlly distributed error term. The degree of bsolute risk version nd the degree of bsolute

9 S.-Y. Chou et l. / Journl of Public Economics 87 (003) prudence (Kimbll, 1990) re both constnt nd equl to. Finlly, we ssume households must hve non-negtive net worth At in ll periods. The optiml consumption levels s of time zero cn be solved s 1 (T t 1)s Ct5]] At1 (Yt M t) ]]]]] () T t 4 nd optiml consumption stisfies s Ct11 5 Ct1]] 1 t. (3) Eq. () implies tht increses in either uncertinty bout future helth cre expenditures (s ) or the degree of bsolute prudence () will yield smller consumption nd greter precutionry sving (5Y M C ). Eq. (3) shows the t t t effect of uncertin helth expenditures on the slope of the consumption pth. Higher risk of future helth cre expenditures (s ) or higher bsolute prudence () led the household to defer consumption nd result in steeper consumption pth. The implementtion of NHI reduces the risk of unexpected medicl expenditures, nd thus discourges precutionry sving nd flttens the consumption pth. If the household s precutionry-sving motive is strong, the NHI will hve 8 positive welfre effect in terms of consumption smoothing. In our empiricl work, we test the ssumption of constnt bsolute prudence imposed bove. Kimbll (1990) suggests tht prudence, like risk version, is likely to decline with welth. Decresing bsolute prudence implies tht the precutionry-sving motive decreses with welth. People who hve mssed considerble ssets will be less sensitive to risk. The welfre impliction of decresing bsolute prudence is importnt. It implies tht lower-income people will be more sensitive to the risk reductions, tht is, NHI will hve lrger impct on their precutionry sving nd consumption. In terms of consumption smoothing, the welfre gin from NHI is lso lrger for lowerincome households. 8 Another potentil welfre gin is through the lbor-mrket response. Unlike Government Employees Insurnce nd Lbor Insurnce, the Ntionl Helth Insurnce progrm is not linked to employment sttus. As result, workers my choose to work fewer hours or to chnge jobs. Incresing flexibility in job choice expnds the opportunity set nd improves welfre. Moreover, if NHI leds to n increse in mternity leve time, the long-run consequences on child development my be beneficil to society. The helth nd productivity of the workforce my lso improve either through greter investment in helth cre or through reduction in lbor-force prticiption of mrginl workers.

10 188 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Dt nd smple 4.1. Dt The dt re from the Survey of Fmily Income nd Expenditure (SFIE) conducted ech yer since 1976 by the Directorte-Generl of Budget, Accounting nd Sttistics, Tiwn. The SFIE is lrge, ntionlly representtive household survey. We restrict our smple to the period 1991 through 1998 for two resons. First, we wnt to exclude the impcts of other helth-insurnce policies prior to Second, we use more recent dt to limit the impct of technology diffusion on growing medicl-cre expenditures. The survey contins informtion on demogrphic chrcteristics, economic sttus, nd industril sector of employment for ech member of the smpled households. It lso includes informtion on household income nd consumption. Household income includes employee compenstion, entrepreneuril, property, nd trnsfer income for ll household members. Totl consumption expenditures include both durble nd non-durble goods. For the household hed nd spouse, the survey provides informtion on individul wge rtes nd incomes. The surveys include informtion on estimted vlue of the household s ssets including residentil property, other rel estte, business equity, vehicles, mchinery, nd equipment. However, these questions were omitted from the surveys. All smples re drwn ech yer, so we cnnot trck individul households longitudinlly. About 13,000 16,000 households re surveyed nd pproximtely 5,000 68,000 civilins ged 15 nd bove re interviewed ech yer from 1991 to Smple Our smple is restricted to households heded by 0 65 yer old mrried 9 person who ws employed in the public or privte sectors or self-employed. 10 Agriculturl fmilies were excluded from the smple. Also deleted were households whose dt on net sving ws missing or who hd negtive net sving. These restrictions result in smple of 65,953 of which 58,445 household heds (88.6%) were non-government employees nd 7508 (11.3%) were government employees. Among non-government employed households, 19,314 (33.0%) spouses did not work; nd mong government-employed households, 074 (7.6%) spouses did not work. 9 The public sector includes two types of employees: government nd public enterprise. If employees of public enterprise re not civil servnts, their spouses, children nd prents were not covered by government helth insurnce. We exclude this smll proportion of employees. 10 Agriculture ccounts for smll shre of the Tiwn economy. About 8% of households re griculturl nd griculture contributed 3.8% of GDP in 1991.

11 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Empiricl strtegy 5.1. Difference-in-differences estimtion To estimte the effect of Ntionl Helth Insurnce on households precutionry sving, our strtegy is to compre the chnge in sving for non-government employed households before nd fter implementtion of NHI with the corresponding chnge for government employed households (who received similr insurnce pckges before nd fter NHI). Prior to NHI, household could obtin helth insurnce coverge for ll fmily members if either the husbnd or wife worked in the government sector. Accordingly, we define three tretment groups nd one control group bsed on the husbnd wife joint employment sttus. The control group includes households where the hed works in the public sector nd the spouse (if ny) either works in the public sector or is unemployed or out of the lbor force (N54000). Tretment group I includes households where the household hed is non-government employee nd the spouse is either not in the lbor force or unemployed (N519,314). Tretment group II includes households where both the household hed nd spouse work in the privte sector (N536,907). Tretment group III includes households where the hed nd spouse work in different sectors, one in the privte sector nd one in the public sector (N5573). We nticipte tht NHI ffects sving by the first two tretment groups, but not by the third tretment group. Tretment group III is null tretment group. Becuse its members were ble to obtin helth insurnce coverge for ll household members through Government Employees Insurnce, their response to NHI should be similr to tht of the control group. Tretment group III provides test of the ssumption tht observed covrites re dequtely controlled to estimte tretment effects (Meyer, 1995). We distinguish tretment group III from the control group becuse these households hd ccess to both Government Employees nd Lbor Insurnce. In contrst, tretment groups I nd II re nticipted to chnge their sving nd consumption behviors becuse some household members were not ble to obtin helth insurnce before the NHI reform. These groups differ with regrd to whether only one or both spouses were employed. An dvntge of using two tretment groups is tht if we find similr results, we cn be more confident tht we re estimting n ctul effect of NHI reform nd not n effect of other contemporneous chnges. In the following text, government employed households refers to the combintion of control group nd tretment group III (t lest one household member works in the public sector), nd non-government employed households refer to the combintion of tretment groups I nd II (no household member works in the public sector). The simple difference-in-differences estimtor cn be expressed s: s d s d NHI After NHI Before NHI After NHI Before NHI tretment tretment control control D 5 Y Y Y Y (4)

12 1884 S.-Y. Chou et l. / Journl of Public Economics 87 (003) NHI where D represents the effect of NHI, nd Y denotes sving or consumption by the tretment nd control group before nd fter NHI, s indicted by the sub- nd 11 superscripts, respectively. As described in Section, the NHI is expected to hve lrger impct on the sving nd consumption behviors of non-government employed households thn on government employed households. The difference-in-differences estimtor cn be expressed within regression frmework. We pool the smples of control nd tretment groups nd estimte the following regression: Yht 5 1 g1nhiht 1 gtretht 1 g3nhiht * Tretht 1 b1xht 1 bd1 j bt 3 kt 1 bz1 (5) 4 t ht where h indexes households, j indexes region, k indexes city/ county, nd t indexes yer. Yh is the sving or consumption observed for household h, NHI is n indictor vrible for the period fter implementtion of Ntionl Helth Insurnce, Tret is n indictor vrible for the tretment group, X is vector of observble household chrcteristics, dj is fixed regionl effect, tkt is the yerly city/county unemployment rte, zt is fixed yer effect, nd is rndom error term. The coefficients of these control vribles re ssumed to be constnt cross NHI yers. The effect of NHI in Eq. (5) cn be expressed s: D 5 f(g11 g1 g 3) g fg1 0g5 g 3. The coefficient g3 mesures the difference-in-differences defined in Eq. (4). 5.. Dependent nd explntory vribles 1 We specify two dependent vribles: (1) household consumption expenditures, nd () household sving, defined s the difference between totl household disposble income nd household consumption expenditures. The ll-items Con- 13 sumer Price Index (CPI) is used to convert ll money figures to 1991 NT dollrs. The men nd distribution of household sving by husbnd wife joint employment sttus re presented in Tble. For non-government employed households, verge nnul household sving is NT$54,039, which is the difference between verge nnul household income NT$919,703 nd nnul household consumption expenditures NT$665,664. The verge sving, income, nd consumption expenditures re higher for government-employed households. The distributions of sving 11 Similr difference-in-differences estimtors hve been used widely, for exmple by Gruber (1994) nd Hmermesh nd Trejo (000). 1 Household consumption expenditures include food, beverge, tobcco, clothing, fuel, wter, rent (pid or imputed), furniture nd fmily fcilities, medicl cre nd snittion, trnsport nd communiction, recretion, eduction, culture, nd other miscellneous expenditures. 13 The verge exchnge rte ws US$ New Tiwn dollrs (NT$) in 1991.

13 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Tble Distribution of sving, income, nd expenditures by husbnd wife joint employment sttus b c Sving Totl household income Totl household expenditures Non-government Government Non-government Government Non-government Government employed employed employed employed employed employed household household household household household household Men 54, , ,703 1,09, , ,556 Stndrd Devition 94, ,714 51, , , ,14 10th percentile 34,458 74, , , ,33 439,386 5th percentile 84, ,95 599,07 837,484 44, ,974 50th percentile 179,15 317, ,896 1,118,73 589, ,74 75th percentile 331,63 58,64 1,098,400 1,469, ,75 985,160 90th percentile 54, ,85 1,501,513 1,838,17 1,069,818 1,44,854 Number of observtions 56, , ,1 973 Notes: All vlues re in NT dollrs. The 1991 exchnge rte is US$155.75NT$. Sving is defined s the difference between totl household income nd expenditures. b Totl household income includes employee compenstion, entrepreneuril income, imputed rent income, current trnsfer receipts nd other miscellneous receipts. c Totl household expenditures include food, beverge, tobcco, rent (pid or imputed), fuel, household opertions, furniture nd fmily fcilities, medicl cre nd snittion, trnsport nd communiction, recretion, eduction nd culture, other miscellneous expenditures. nd consumption re right-skewed for both groups of households. We use robust regression techniques to ccount for this feture. Xhjt is vector of demogrphic nd economic chrcteristics of the household: the hed s eduction (6 ctegory dummies), ge, ge squred, gender, spousl eduction dummies, number of children under the ge of 18 yers, number of children over the ge of 18 yers, number of elderly prents or grndprents nd the unemployment rte in the residentil county. Tble 3 presents summry sttistics for the explntory vribles by husbnd wife joint employment sttus. Compred with the tretment groups, household heds in the control group were 14 older, better educted, nd hd slightly fewer children under the ge of 18 yers nd fewer elderly prents living in the household Mrginl effect of dummy vrible on logged dependent vrible We employ ordinry lest squre (OLS) to estimte the model nd White s 14 One reson tht government employees re better educted is tht Tiwn hs Civil Servnt Certifiction Exm (much like the U.S. Foreign Service exm or the Postl Service Exm, but more comprehensive). The higher eduction of government employees spouses my lso reflect ssorttive mting.

14 1886 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Tble 3 Smple sttistics Employment sttus Control group Tretment group I Tretment group II Tretment group III Household hed Work in the public Work in the privte Work in the privte Work in the privte sector. sector. sector. or public sector. Spouse Work in the public Not in the lbor Work in the privte Work in the public sector or not in force or unemployed sector or privte sector the lbor force unemployed (i.e. work in Men Std. dev or unemployed different sectors) Men Std. dev. Men Std. dev. Men Std. dev. Dependent vribles Sving 41,43 46,768 73,013 90,734 17,781 97, , ,875 Consumption 763,81 343, ,316 73, ,177 35, , ,496 Explntory Vribles Chrcteristics of houeshold hed Junior high school Senior high school Community college University Grdute school Mle Age Age (00) Chrcteristics of fmily members Spouse eduction dummies Junior high school Senior high school Community college University Grdute school [ of children under ge [ of children over ge [ of prents or grndprents Other vribles Unemployment rte by county Regionl dummies North Middle South Smple size ,314 36, method to correct the estimte of the vrince covrince mtrix for potentil heteroscedsticity (White, 1980). As discussed by Mnning (1998), if the residuls re non-norml or heteroscedstic, the mrginl effect of the explntory vribles on the logged dependent vrible is unbised, but the mrginl effect on the

15 S.-Y. Chou et l. / Journl of Public Economics 87 (003) untrnsformed dependent vrible is bised. We follow Mnning et l. (1987) nd use the smering method to retrnsform the dependent vrible to clculte the mrginl effect of ntionl helth insurnce on precutionry sving. Specificlly, the mrginl effect of NHI cn be expressed s E(YuNHI 5 1) E(YuNHI 5 0). The generl form of the retrnsformtion for logliner model is given by E(Y) 5 f exp(xb ), where the so-clled smering fctor f 5 E[exp( )]. The estimte of the smering fctor is the smple verge of the exponentited lest-squres residuls. Finlly, the stndrd errors of the mrginl effects re obtined by bootstrpping Quntile regression In ddition to exmining how verge sving is ffected by NHI, we investigte how the effect of NHI differs cross households with different levels of sving. Precutionry sving depends on the risk of future medicl expenses nd the household s degree of bsolute prudence (Eq. ()). Kimbll (1990) suggests tht bsolute prudence declines with welth. Unless this decline is offset by sufficiently lrge increse in risk of future medicl expenses with welth, households t the bottom of the sving distribution will be more sensitive to the introduction of NHI thn will households t the top of the distribution. If so, this implies tht the welfre gin, in terms of consumption smoothing, is lrger for households in the bottom prt of the sving distribution. A nturl nd reltively simple wy to explore differences cross the distribution of household sving is through the use of quntile regressions (Buchinsky, 1994). Quntile regression cn be used to estimte the mrginl effect of n explntory vrible t distinct point of the conditionl distribution of the 15 dependent vrible. 6. Empiricl results 6.1. Difference-in-differences estimtes The first row (lbeled bseline model) of Tble 4 reports simple difference-indifferences estimtes of the effect of Ntionl Helth Insurnce on households sving nd consumption expenditures tht do not control for household chrcteristics, region nd yer effects. We clculte these estimtes using the regression model (5) excluding the control vribles. Becuse our dependent vribles re mesured in log terms, we retrnsform the estimted coefficients nd present the estimted mrginl effects in brckets. The simple difference-in-differences estimtes imply tht NHI significntly reduced sving in tretment groups I nd II 15 Estimtes were clculted using the sqreg procedure of STATA Version 6.

16 1888 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Tble 4 Estimtes of ntionl helth insurnce on sving nd consumption Log (sving) Log(consumption) Tretment I Tretment II Tretment III Tretment I Tretment II Tretment III coeff. std. err. coeff. std. err. coeff. std. err. coeff. std. err. coeff. std. err. coeff. std. err. Bseline model NHI (post 1995)*Non-government 0.18 (0.038) (0.035) c (0.04) c 0.08 (0.014) 0.06 (0.014) 0.01 (0.017) employment sttus b [0.084] c [0.063] c [0.07] c [0.06] [0.057] [0.003] Full Specifiction NHI (post 1995)*Non-government 0.09 (0.034) 0.1 (0.03) b (0.038) (0.011) (0.011) (0.013) employment sttus [0.137] [0.086] [0.051] b [0.09] [0.036] [0.008] Non-government employment sttus (0.07) 0.14 (0.03) (0.06) (0.009) (0.008) (0.009) NHI (post 1995) (0.034) (0.04) 0.8 (0.01) 0.44 (0.01) 0.1 (0.015) Chrcteristics of houeshold hed Junior high school (0.04) 0.01 (0.018) 0.09 (0.063) (0.007) (0.005) (0.019) Senior high school (0.04) (0.018) 0.9 (0.050) (0.007) (0.005) (0.015) Community college (0.03) 0.50 (0.03) (0.051) 0.60 (0.010) 0.8 (0.007) 0.58 (0.016) University (0.038) (0.06) (0.05) (0.01) (0.008) 0.31 (0.016) Grdute school (0.061) (0.043) 0.67 (0.061) (0.01) (0.015) (0.00) Mle 0.58 (0.034) 0.15 (0.06) (0.041) (0.010) (0.009) (0.014) Age (0.007) 0.06 (0.006) (0.010) 0.05 (0.00) 0.0 (0.00) 0.08 (0.003) Age (00) (0.008) (0.006) 0.09 (0.011) 0.05 (0.00) 0.01 (0.00) 0.06 (0.004) Chrcteristics of fmily members Spouse eduction dummies Junior high school 0.08 (0.03) (0.018) (0.044) (0.007) (0.005) (0.014) Senior high school (0.05) (0.018) 0.11 (0.039) (0.007) (0.006) (0.01) Community college (0.038) 0.81 (0.05) (0.04) 0.43 (0.01) 0.81 (0.008) 0.33 (0.014) University (0.043) 0.48 (0.030) (0.045) 0.3 (0.014) (0.010) (0.015) Grdute school (0.117) (0.069) (0.073) (0.039) (0.06) (0.08) [ of children under ge (0.008) (0.006) (0.01) (0.00) 0.06 (0.00) (0.004) [ of children over ge (0.010) (0.008) (0.016) 0.31 (0.003) (0.003) (0.005) [ of prents or grndprents 0.33 (0.01) (0.009) (0.016) (0.004) (0.003) (0.006) Unemployment rte (0.059) 0.06 (0.064) (0.086) b (0.00) (0.03) 0.01 (0.03) Smple size F-sttistics Adjusted R Notes: Stndrd errors re in prentheses. Estimted mrginl effects, incorporting the smering fctor, re in brckets. Control vribles lso include constnt, region nd yer dummies which re not reported here. Sttisticlly significnt t the 1% level. b Sttisticlly significnt t the 5% level. c Sttisticlly significnt t the 10% level.

17 S.-Y. Chou et l. / Journl of Public Economics 87 (003) by 8.4 nd 6.3%, respectively. These estimtes lso suggest tht NHI significntly incresed households consumption expenditures by.6 nd 5.7%, for tretment 16 groups I nd II, respectively. Below the bseline model in Tble 4, we report the difference-in-differences estimtes including the other control vribles identified in Eq. (5). The estimted effects re similr to those in the bseline model, which suggests tht the difference-in-differences pproch performs well in ccounting for generl economic shocks tht re correlted with chnges in the demogrphic, regionl nd time chrcteristics. The mrginl effects on svings nd consumption for tretment groups I nd II re sttisticlly significnt t the 1 or 5% level. Results from the full specifiction imply tht NHI significntly reduced household sving by 13.7 nd 8.6% nd incresed consumption expenditures by.9 nd 3.6% for 17 tretment groups I nd II, respectively. Results for tretment group III provide test of the qulity of our control group, since tretment group III is expected to hve similr response to the NHI reform s the control group. Although the simple difference-in-differences estimte suggests tht NHI incresed sving in the null tretment group III by 7.% (significnt t the 10% level), the estimted effects of NHI controlling for smple chrcteristics using the full specifiction re not significntly different from zero. This suggests we cn identify the effect of NHI reform fter controlling for other covrites. If we merge tretment group III with the control group, we obtin somewht smller estimtes of the effect of NHI on sving nd consumption, but 18 the estimted effects re ll significnt t the 1% level. Tken together, these results re consistent with the theoreticl prediction tht 16 Tiwn extended its Lbor Stndrds Lw to cover the bnking, insurnce, nd service sectors in 1998, the end of our smple period. The lw requires employers to provide retirement nd severnce benefits. Although this chnge would be nticipted to increse consumption nd decrese sving by ffected workers, Levenson (1996) showed tht the 1985 doption of the lw, which initilly covered mnufcturing, construction, trnsporttion, nd other workers, hd no significnt ffect on consumption by ffected households. To test whether the 1998 reform ffects our estimtes of the effects of NHI, we deleted the ffected workers (477 in tretment group I nd 990 in tretment group II) nd re-estimted the models in Tble 4. The predicted mrginl effects nd significnce levels re quite similr to those reported in Tble 4, suggesting this chnge in lbor lw cnnot ccount for our estimtes of the effects of NHI. The lterntive estimtes (significnce levels) re: for sving, 0.18 (1%) nd 0.08 (1%) in tretment groups I nd II; for consumption, 0.03 (10%) nd (5%) in tretment groups I nd II, respectively. 17 We estimte the sme model on smple of one-person households (government versus nongovernment households). The results (not reported) show tht NHI decresed precutionry sving by 1.7% nd decresed consumption by 0.14%. The effects re smller thn those for the full smple nd re not sttisticlly significnt. They suggest tht non-government employees plce more weight on helth insurnce coverge for their fmily members thn on the extension of coverge to their retirement. 18 Using the pooled control group nd tretment group III s control group in the full specifiction, the estimted mrginl effects on sving re 6.1 nd.6% for tretment groups I nd II, nd the estimted mrginl effects on consumption re.3 nd.7% for tretment groups I nd II, respectively.

18 1890 S.-Y. Chou et l. / Journl of Public Economics 87 (003) NHI reduces households precutionry sving nd increses consumption expenditures. NHI hs smller impct on the sving nd consumption behviors of the control group nd the null tretment group III, which hve comprble insurnce coverge before NHI. In contrst, households in tretment groups I nd II reduce their precutionry sving in response to improvements in helth insurnce benefits. By exploiting the vrition in the uncertinty of helth expenditures before the implementtion of NHI, we re ble to control for spurious economic shocks nd identify the effect of NHI on precutionry sving. The difference between the effects of NHI on sving nd on consumption ( decrese in sving nd increse in consumption) suggests tht the effects re due to reduction in risk, not n increse in expected income net of medicl expenses tht results from subsidized insurnce premium. The effect of n increse in current net income on sving my depend on expecttions bout future chnges in net income, but seems unlikely to decrese current sving. NHI my lso ffect households lbor supply. For exmple, women my reduce their working hours or lbor force prticiption, becuse NHI benefits re not linked to their employment 19 sttus. 6.. Quntile regression results To test the effect of NHI on sving cross the household-sving distribution, we estimte quntile regressions on households sving for tretment group I nd II Tble 5 Quntile regression on sving Quntile Tretment group I Log(sving) (0.087) (0.056) (0.034) (0.07) (0.08) Tretment group II Log(sving) b 0.17 b 0.10 b (0.085) (0.054) (0.036) (0.03) (0.04) Notes: Bootstrpped stndrd errors for quntile regressions re given in prentheses. Sttisticlly significnt t the 1% level. b Sttisticlly significnt t the 5% level. 19 Chou nd Stiger (001) found tht the vilbility of spousl helth insurnce in Tiwn decresed lbor force prticiption by 4% mong mrried women. Their results re bsed on the vilbility of Ntionl Helth Insurnce in 1995 nd the expnsion of Government Employees Insurnce to spouses in 198. Other studies tht provide empiricl evidence on the effects of helth insurnce on lbor supply re reviewed by Gruber (000).

19 S.-Y. Chou et l. / Journl of Public Economics 87 (003) Tble 6 Chnge in risk, chnge in sving, nd bsolute prudence by income quntile Income (1) () (3) (4) (5) quntile Risk of medicl Chnge in Chnge Absolute expenditures risk (NT$) in sving prudence (00,000,000 NT$) Before NHI After NHI 5() (1) (NT$) 5(4)/(3), , nd, ,341 10, nd, ,334,394 16, ,389,936 56, (Tble 5). With the full specifiction, NHI hs the lrgest negtive impct (0.95) on the first (lowest) decile for tretment group I. The effects decrese for higher quntiles, with the ninth decile hving point estimte of In ll cses the estimted coefficients re sttisticlly significnt t the 5% level. We observe the sme pttern for tretment group II. These results suggest tht NHI hs the lrgest negtive effect on sving t the bottom quntile, nd the effects tend to become smller the higher the quntile. To investigte how the degree of prudence vries cross income levels, we compre the bsolute chnge in sving with the bsolute chnge in risk of medicl expenses by income quntile (Eq. ()). First, we predict out-of-pocket medicl expenses s function of household chrcteristics nd NHI. Second, we use the coefficients from the estimtes in the first step to predict verge medicl expenses nd the vrince of residuls (s in Eq. ()) before nd fter NHI. The results, shown in Tble 6, indicte tht uncertinty bout medicl expenditures ws greter before NHI. Households in the top income quntile hve the lrgest uncertinty with regrd to out-of-pocket medicl expenditures. The vrinces of the residuls drop drsticlly fter implementtion of NHI, indicting the NHI reduces uncertinty bout out-of-pocket helth expenditures. Risk of out-of-pocket expenditures, mesured by the vrince of the residuls, decreses the most for the top income quntile. Third, we cn estimte number tht is proportionl to the degree of bsolute prudence by dividing the chnge in sving (NT$) by the chnge in risk of medicl expenses (NT$ squred). As shown in Tble 6, the degree of bsolute prudence declines with income. 7. Conclusion The introduction of socil helth insurnce cn substntilly reduce uncertinty bout out-of-pocket helth expenditures, nd thus reduce households pre-

20 189 S.-Y. Chou et l. / Journl of Public Economics 87 (003) cutionry-sving motive. Exmintion of the effect of Ntionl Helth Insurnce on Tiwnese households sving nd consumption behviors suggests tht households significntly reduced their sving nd incresed their consumption when the comprehensive helth insurnce becme vilble. These results re robust to vriety of specifictions. Contrry to Strr-McCluer s (1996) finding tht helth insurnce is positively relted to welth, our study offers more direct test of the impct of helth insurnce on sving tht is not subject to selection bis. By exploiting the fct tht government nd non-government employed households received different insurnce pckges before NHI, our pproch controls for idiosyncrtic shocks nd identifies the effects of NHI on households sving nd consumption. Our empiricl results re consistent with recent studies tht hve found tht coverge by other socil progrms, such s disbility insurnce (Kntor nd Fishbck, 1996), unemployment insurnce (Engen nd Gruber, 001) nd Medicid (Gruber nd Yelowitz, 1999), re negtively ssocited with sving. Unlike these studies, we exmine helth insurnce, which is more likely to ffect precutionry sving throughout the popultion. We find tht NHI hs lrger impct on precutionry sving for households t the bottom of the sving distribution thn for those t the top. This result supports the ssumption of decresing bsolute prudence nd is consistent with the theoreticl rgument of Kimbll (1990) nd the empiricl result of Guiso et l. (199). It further suggests tht NHI yields lrger welfre improvement, through consumption smoothing, for households with smller sving. Our evidence supports the contention tht precutionry motives re n importnt determinnt of sving. This study provides some explntion for two consumption puzzles mentioned by Zeldes (1989b): the excess sensitivity of consumption to nticipted income fluctutions (people sve too much ) nd the steep consumption pth in the presence of low or negtive rel interest rte (people consume too little ). Finncil risk nd the level of helth expenditure ffect sving nd consumption decisions, s suggested by Kotlikoff (1989), Plumbo (1999) nd Hubbrd et l. (1995). Our findings suggest tht the introduction nd expnsion of socil helth insurnce will contribute significntly to the decline in privte sving. Moreover, even if eligibility for the insurnce policy is not mens tested, it my still hve lrger impct on households t the bottom thn the top of the sving distribution. Acknowledgements We re grteful to n nonymous referee, the editor, nd conference prticipnts t the AEA-CEANA, Duke Helth Economics Conference, nd ihea for helpful comments.