Cambios al sistema de concesiones durante

Figure(19) plots the age-adjusted community-rated premium that will be charged

in the individual market after the reform28_{. The premium increases with age due to}

the increase in the mean of medical expenses. Figure(19) allows to compare premiums in the individual and employer-based markets. The latter premium is also community rated though not age-adjusted. The individual market premium stays below the group premium for people younger than age 44, for people older than 44 the individual premium exceeds the group premium, and the gap increases with age.

Figure(19) also allows to compare the community-rated premium in the individual market with risk-adjusted premiums in the unregulated market. The dash lines plot individual premiums conditioned on medical expenses for the five lowest grids of medical expenses. One can see that the community-rated premium exceeds risk-adjusted premium for the three lowest medical expenses groups. It stays around the level of unregulated

28

Because of the subsidy schedule embedded in the reform we do not have to worry about the possibility of equilibrium when only people with high medical expenses participate in the market and the resulting price is very high. The subsidy guarantees that the fraction of paid insurance premiums in income does not depend on the actual size of the premium. This significantly reduces the sensitivity of market participants to the price of insurance.

premium for people on the 4th grid of medical expenses. The fact that the community rated premium is below the risk-adjusted premiums for the highest three medical expense groups, means that after the reform we observe a good risk-pooling in the individual market without the signs of the adverse selection spiral. Next section will discuss how much this outcome is due to penalties and how much - to subsidies.

25 30 35 40 45 50 55 60 0 1 2 3 4 5 6 7 8 9 Age Premiums,$000

CR premium after reform Group premium Individual premium x=1 Individual premium x=2 Individual premium x=3 Individual premium x=4 Individual premium x=5

Figure 19: Individual vs group market premiums

7.4

Welfare

Consumption equivalent variation for the reformed economy is presented in the first row of Table 10. The reform brings a significant welfare improvement: a newborn in the baseline economy is willing to give up 0.97% of consumption every period to be born in the

reformed economy29_{. To illustrate the source of these welfare gains Figures (20) and (21)}

plot the level and the log-variance of consumption over the life-cycle before and after the reform. On average after the reform we observe a decrease in consumption at all ages. At the same time the reform brings a significant decline in consumption variance. This means the welfare gains of the reform come from the increased risk-sharing in the economy. This increased risk-sharing is a result of two things. First, people with bad labor market outcomes get transfers from people with good labor market outcomes in terms of subsidies for health insurance purchase. Second, people with high medical expenses get cross- subsidized by people with low medical expenses through community rated individual market. Once educational attainment is realized there is a significant variation in welfare

29

We compare welfare between two steady-states without taking into account the transition period. Since the aggregate capital in the reformed economy is lower than in the baseline, taking transition period into account will make welfare gains even larger.

CEV(%) Agg. capital

No high-school High-school College (% of the

All newborns degree degree degree baseline)

Reform 0.97 2.37 1.79 -0.06 95.3

Only CR 0.05 0.20 0.15 -0.06 100.1

Only CR+high penalties 0.09 0.15 0.13 0.04 99.4

Only redistribution 1.16 2.46 1.98 0.15 95.8

Only redistribution+penalties 1.10 2.38 1.92 0.09 95.3

Table 10: Welfare effect of different versions of the reform

effects of the reform for newborns in different educational groups. High-school dropouts gain the most from the reform: the consumption equivalent variation for this group is 2.37%. On the other hand, newborns with college education prefer the unreformed economy though their welfare losses are very small: the consumption equivalent variation for this group is -0.06%. This asymmetric effect is a result of two things. First, there is an income redistribution embedded in the reform. Second, the reformed economy has a lower aggregate capital (95.3% of the baseline value) and this mostly hurts people with high productivity.

Variable Reform Only CR Only CR+ Only Only redistr+

high penalties redistribution penalties

Insured by ESHI (%) 67.5 67.8 69.1 64.8 67.6 Individually insured (%) 18.3 2.8 10.1 15.4 22.4 Uninsured (%) Total 4.7 25.2 16.8 10.2 0.5 High-school dropout 8.1 47.9 39.8 9.6 0.2 High-school graduates 4.3 24.8 16.5 8.9 0.5 College graduates 3.9 16.2 7.7 12.3 0.6 Publicly insured (%) 9.4 4.1 3.9 9.4 9.4

ESHI take-up rate (%) 95.7 96.2 98.0 92.0 95.9

25 30 35 40 45 50 55 60 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 Age Consumption Consumption, Total Baseline Reform

Figure 20: Consumption before and after the re-

form (normalized by average wage)

25 30 35 40 45 50 55 60 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 Age Variance of consumption

Variance of Consumption, Total

Baseline Reform

Figure 21: Variance of consumption before and

after the reform (normalized by average wage)

Figure (22) compares the level and the log-variance of the average consumption before and after the reform for each educational group. The reform has the opposite effect on the level of consumption for people with low and high educational attainment. For high- school dropouts consumption after the reform is higher for all ages. For high-school and college graduates the reform brings a decline in the average consumption. At the same time, the variance of log consumption decreases in each educational group. It may seems surprising that the variance of log consumption decreases significantly even for college graduates. Majority of this group buys insurance in the employer-based market and are less affected by the new rules in the individual market. However, it is important to note that in the baseline economy these people face the risk of loosing ESHI every period. This event likely coincides with a negative income shock. If it also coincides with a large medical shock, these people experience a significant change in the price of their health insurance: instead of community rated group premium they have to buy insurance at a price fully adjusted for their high expected medical costs. After the reform the loss of the ESHI becomes less painful for two reasons. First, the individual market also becomes community rated. Second, people who loose their job with ESHI can become eligible for a subsidized insurance coverage.