Income Differences and Health Disparities: Roles of Preventive vs. Curative Medicine

Using data from the Medical Expenditure Panel Survey (MEPS) I find that early in life the rich spend significantly more on health care, whereas from middle to very old age the poor outspend the rich by 25% in the US. Furthermore, while low-income individuals are less likely to incur medical expenses, they are more prone to experiencing extreme expenses when they do seek care. To account for these facts, I develop and estimate a life-cycle model of two types of health capital: physical and preventive. Physical health capital determines survival probabilities, whereas preventive health capital governs the distribution of shocks to physical health capital, thereby controlling life expectancy. Moreover, I incorporate key features of the US health care system, including private and public health insurance. Because of their lower marginal utility of consumption the rich spend more on preventive care, resulting in milder health shocks (and lower curative medical expenditures) in old age compared to the poor. Notably, public insurance—which by design covers large expenditures—amplifies these differences by hampering the poor’s incentives to invest in preventive health. Therefore, the model also implies a widening life expectancy gap between income groups in response to rising inequality. Policy experiments suggest that expanding health insurance coverage and subsidizing preventive care to encourage health care use by the poor early in life can generate substantial welfare gains, even when accounting for the higher taxes required to finance them.