The Impact of Medical and Nursing Home Expenses and Social Insurance

Karen A. Kopecky and Tatyana Koreshkova
Working Paper 2010-19
December 2010

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We consider a life-cycle model with idiosyncratic risk in labor earnings, out-of-pocket medical and nursing home expenses, and survival. Partial insurance is available through welfare, Medicaid, and social security. Calibrating the model to the United States, we find that 12 percent of aggregate savings is accumulated to finance and self-insure against old-age health expenses given the absence of complete public health care for the elderly and that nursing home expenses play an important role in the savings of the wealthy and on aggregate. Moreover, we find that the aggregate and distributional effects of public health care provision are highly dependent on the availability of other programs making up the social insurance system.

JEL classification: E21, H31, H53, I18, I38

Key words: out-of-pocket medical expenses, nursing home costs, means-tested social insurance, life-cycle savings, wealth inequality, social security

The authors thank Arpad Abraham, Rui Castro, Eric French, Joao Gomes, Jonathan Heathcote, Narayana Kocherlakota, Leonardo Martinez, Jose Victor Rios-Rull, Juan Sanchez, John Karl Scholz, Ananth Seshadri, Richard Suen, and Motohiro Yogo for helpful comments and Kai Xu for excellent research assistance. They also thank seminar participants at the Atlanta and Minneapolis Federal Reserve Banks, the Université de Montréal, the University of North Carolina at Chapel Hill, the University of Western Ontario, University of Wisconsin-Madison, and the Wharton School and conference participants at the 2008 Canadian Macro Study Group, the 2007 and 2008 Wegmans Conferences at the University of Rochester, the 2008 Conference on Income Distribution and Family at the University of Kiel, the 2009 meeting of the Society for Economic Dynamics, and the 2009 Conference on Health and the Macroeconomy at the Laboratory for Aggregate Economics and Finance at the University of California, Santa Barbara. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Karen A. Kopecky, Economist, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8974,, or Tatyana Koreshkova, Assistant Professor, Department of Economics, Concordia University, 1455 de Maisonneuve Boulevard West, Montreal, Quebec, Canada, H3G 1M8, 514-848-2424 ext. 3923,

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