Response to referee comments:
I would like to thank the referee for the careful review and the valuable comments, which provided insights that
helped improve the paper. I have reproduced the comments below, separated into groups of paragraphs I
addressed together. I have underlined what I interpreted as the operative ideas in the comments. After each
group of paragraphs, written in italics, is an explanation of how I incorporated the suggestions into the paper.
Reviewer #1: The author addresses an important question: How do public policies affect people's consumption
choices in a realm -- individual health -- where those choices have potentially large long-term costs/externalities. I
applaud the author's efforts to construct models that examine whether policies directed at improving the health of
one group (the poor) might adversely affect not only that group, but also other populations (e.g., the wealthy).
With health care reform once again on the national agenda, these are timely questions with serious practical
implications.
Because the practical implications are so important, any model that seeks to capture what's going on in individuals'
minds as they make health-affecting choices must rest on sound, empirically grounded, and fully developed
assumptions. With regard to the assumptions, I have several concerns - none of which is insurmountable, but all of
which I feel need to be explicitly addressed.
The first question revolves around the assertion on p. 2 that "the model predicts that ... high ... income individuals
invest less in self-protection (healthy lifestyle) than is socially optimal." The author should spell out the mechanism
that is responsible for this under-investment. I assume, from later in the article, that the author is saying that, if
rich people pay taxes to support poor people's health care, the rich will have less money to spend on their own
disease prevention. At first blush, that seems reasonable enough, but...
The referee points out a significant shortcoming in the paper – many of the implications causal factors derived from
the mathematics were not interpreted. Instead they were left for the reader to interpret which is a major failure on
my part. I have tried hard to rectify my failure in the rewrite, adding interpretation at key findings, and trying to
relate the outcomes and implications to the actual public finance system.
In that regard, I respectfully disagree somewhat with the referee’s interpretation that the rich cut their spending on
disease prevention because they will have less money to spend on it. In truth, it is more complicated than that, and
the primary driver of the reduced investment in prevention by the rich is that staying healthy is less valuable. I have
been explicit to this point four times in the paper. First, in the Introduction, at the end of the second paragraph in
which I summarize the results I added the explanations for reductions on the part of both the poor and the rich,
“...the poor because becoming ill has less of an impact on them, and the rich because staying healthy has less
incremental value when compared to getting sick.” (page XXX)
Later in the paper, at the point I derive optimal conditions for the high income people, I add the following
interpretation, “One question is why the higher taxes lowers the self-protection investment among high-income
people. Looking at the right-hand-side of (4) we see that the expected marginal benefit of not getting sick goes
down. Quite simply, higher taxes (if healthy in their second period of life) makes being healthy less valuable, hence
individuals invest less in preventive care . This conclusion is not solely an income effect from paying higher taxes.
There is also a substitution effect. Since the expected marginal value of staying healthy falls, wealthy people
substitute away from it in their first period consumption.” (page XXX)
I also added interpretation for alternative policies. When the tax is instead applied to the young wealthy I say,
“However, the cause of the decrease in the investment wealthy people make in their own future health is different.
Recall if the tax is imposed when the wealthy are old the marginal value of being a healthy rather than ill older
person goes down for the wealthy. In this case, the decrease in protection investment comes because the marginal
utility of consumption while young increases . As with taxes on the older healthy wealthy, there is again an income
and substitution effect. With lower after tax income the younger wealthy have higher marginal utility. This is the
“price” (in terms of opportunity cost) of spending on a healthy lifestyle. Since the price has gone up, the younger
wealthy buy less of it.” (page xxx)
Finally, these reasons are emphasized in the first paragraph of the concluding section of the paper, “...and the
effect on the wealthy is not just because they have less money. There is a substitution effect away from selfprotective activities that compounds the income effect.” (page xxx)
If this is the assumption in the model, several questions immediately spring to mind. First, while taxation obviously
reduces disposable income, I'm not clear that, in the absence of Medicaid, rich people would be using that extra
income to invest in their own health protection. They could just as easily spend it on booze, cigarettes, fast cars,
big TV's, or sky-diving! Following from that, there seems to be an assumption that, for the wealthy, an
"investment" in one's health requires an investment of money, but I'm not sure that's true. In fact, people who
decide to invest in their health may spend less, not more, money: Broccoli is cheaper than steak; eating less (to
lose weight, and hence prevent heart disease, cancer, diabetes, etc.) is cheaper than eating more; riding a bike to
work is cheaper than driving; cutting back on heavily taxed and costly luxuries like liquor and cigarettes is cheaper
than indulging in them; etc. So, paradoxically, having to pay more in Medicaid taxes might cause rich people to
reduce their consumption expenditures in a way that would enhance their "investment" in their long-term health.
These comments are somewhat predicated on the referee’s interpretation (again, my fault) that the wealthy spend
less on self-protection only because of their lower income. And it is true that my results are predicated on the
simplifying assumptions of the model about how utility is derived. However, since I am focused on a particular
point – the unintended consequences of subsidized health insurance for the poor – this narrow modeling strategy is
useful. At the same time, the comment clearly is an important one that deserves to be addressed in the paper. I
have added footnote 4, borrowing some of the referee’s examples and explaining why my simple model captures
some salient characteristics of behavior we see in the US today (see underlined phrases in the following quote)and
explicitly what I am assuming about the income effects on health behavior. “Often investing in one’s health costs
less than not doing so. Eating less takes less income than eating more; bicycling for transportation costs less than
using a car. In the context of this model, however, that would make investing in health a free good as they would
have to give up no other consumption to do so, and we would expect people to invest in their health until the
marginal utility was zero. Moreover, the high-incidence of behaviorally related health problems such as obesity
indicates that this is not the case; that in fact, improving ones health in some way lowers ones utility. The
characterization of the utility arguments used here captures this idea. We implicitly assume there is no “fast lane”
effect (Phelps, 2003, p. 106) of higher income on health, that is, those with greater incomes do not necessarily
consume a less healthy lifestyle. At the same time, the “health spa” effect is possible because of the greater ability
to invest in a healthier lifestyle that the greater income affords the individual.” (page xxx)
Yet, the paper assumes that there is an automatic negative relationship between rich people's health and their
spending on poor people's health insurance.
I respectfully disagree that the paper assumes that there is an automatic negative relationship between rich
people’s health and their spending on poor people’s health insurance. Instead, this result is derived from a
reasonable specification of rich people’s preferences, one with a direct foundation in the literature starting with
Grossman’s 1972 paper in the JPE. In fact, this is the novel result of the work presented in my paper, predicated on
the idea that non-health consumption is a normal good.
Perhaps most important of all, there seems to be an assumption that Medicaid is a substantively important driver
of rich people's under-investment in their own health protection. I could imagine that a far more important driver,
in fact, is the very moral hazard said to be afflicting poor people. Most rich people are endowed with generous
health insurance programs, and, like Medicaid, they are government subsidized. (Under federal tax law, private
health insurance costs are deductible to employers and self-employed individuals, and individuals can pay for
health care out of tax-sheltered medical savings accounts. These are "tax expenditures," which are treated the
same for government accounting purposes as direct expenditures on programs such as Medicaid.) What is more,
the wealthy have the resources to buy long-term care insurance in the private market.
For me in some ways this is the most important observation the referee makes for it made me think more deeply
about the breadth of the implications from my analysis. Like the referee my thoughts about my model focused on
programs like Medicaid and CHIP and, of course, the implications from the analysis apply to them. However,
precisely because of his observation that many groups beyond the poor have subsidized health insurance, I realized
how far- reaching these effects are and how they apply to many more groups that just those on Medicaid and
associated programs. Thus, I have addressed this issue by, first, adding a section discussing precisely the issue of
taxpayer assisted insurance for the non-poor (see the new section titled “A Digression Back to High Income People”.
(page xxx)
Thus, why would we assume - as the models seem to - that whatever wealthy people pay in (hidden) Medicaid
taxes would affect their health choices more than what they enjoy in (visible) health insurance benefits? Why
wouldn't rich people, with their generous insurance coverage, be just as susceptible to moral hazard (or more so)
than poor people? The models account for taxpayer-subsidized care for the poor, but do not account for taxpayersubsidized, employer-provided care for the rich. Insurance coverage for the rich is the elephant in this article's
living room. It seems to me that public policy is creating moral hazard all around.
This comment is a follow-up to the previous comment, and for the most part the added section “A Digression ...”
addresses these concerns as well, although I separated it to emphasize that I am not interested in explaining all
public policy outcomes, but instead focus on the novel unintended consequences on the wealthier portion of the
population who are taxpayers rather than subsidy recipients. Moral hazard impacts of insurance are very well
documented, and there is little to contribute on this issue in this paper. Complicating the model to add public
subsidies to the non-poor in real life adds nothing to this conclusions. As noted above and now in the paper, it
amounts to mostly redefining the demarcation between wealthy and poor in the paper. At the same time, the
issues raised in this comment deserve notice in the paper. I acknowledge these factors in the paragraph containing
footnote 9 (page xxx)and the footnote itself where I borrow the referee’s delightful phrase, “public policy is creating
moral hazard all around”.
Finally, on the assumption of moral hazard among the Medicaid population... There is another side to the story
that I believe needs to be accounted for. While it is true that the presence of insurance could well lead to an
underinvestment in health protection (moral hazard), public insurance also allows poor people access to
preventive care, potentially reducing unwise health decisions and underinvestment in disease prevention. There
are all sorts of diseases for which early detection and treatment reduce health care costs down the line - diabetes,
heart disease, obesity, hypertension, and so forth. Without Medicaid, poor people would still have a moral-hazard
problem in that they would know they could get free care in the emergency room, but because they would not
have access to preventive care early on, the costs of their poor health choices would be far more burdensome in
the long run.
This is another important comment which influenced how I though about my model. In an earlier version of the
paper I actually had a section where the government subsidized healthy lifestyles for the poor. But as I had
constructed it, it amounted simply to an increase in the poor’s endowment. The referee’s comments made me
realize that my approach there was wrong, and the correct approach is to think about the prevention aspect of
providing health insurance to the poor as essentially a grant for healthy activities. This resulted in a new section
being added to the paper (page xxx) ”Subsidizing Healthy Lifestyles of the Poor” where the poor receive a
combination subsidy for preventive care (in the form of a healthy lifestyle grant) and health insurance if they
become ill. An important conclusion from this richer model is that “ ...for any given government spending and taxes
on the wealthy, programs that include preventive healthcare, like Medicaid and other current programs do, benefit
the poor more than programs that include only palliative and curative healthcare”. This finding was also added to
the conclusions section of the paper, at the end of the paragraph containing footnote 9. (page xxx)
I do not mean to defend Medicaid as an optimal public policy. I am merely pointing out that, to me, the models in
the paper rely on a lot of assumptions that seem either insufficiently spelled out or empirically questionable, and
the power of the models rests on those very assumptions.
I agree with the statements made in this paragraph, and have tried to address the assumptions, both in being more
explicit about them and explaining why they are appropriate in a model of public finance issues in the US
healthcare system.
All of these questions lead to one meta-suggestion: For this paper to work, the introductory section needs to have
a fuller discussion of how the health care "system" actually functions in America and how the many facets of this
complex policy design interact to structure health-investment choices, for good or for ill, for the rich and the poor.
The assumptions need to be clearly spelled-out up front, and to the extent possible, they should be empirically
grounded. This information then can be incorporated into the formal models. I'm not suggesting that the models
need to become hopelessly complex, but to me they are underspecified (per the discussion above) and hence not
as theoretically powerful or practically useful as they have the potential to be.
I found this the most difficult comment to address. It seems that the referee is asking me to complicate the
model(by using the word “underspecified” to describe my model) by adding, I think, insurance for the wealthy and
the accompanying tax-based subsidy. I respectfully decline to do so for reasons given in response to earlier
comments. My shortcoming was not in the modeling, but in the explanation and context. Hopefully I have
improved both to satisfy the referee. I want to stress with this comment that I am not trying to illustrate the entire
failure of the public finance system to address the moral hazard in healthcare subsidies, but to emphasize the novel
effect on the wealthy who are the primary support through taxes while comparing several alternative tax-subsidy
programs to help the non-wealthy with healthcare costs.
As suggested by the referee I have tried to be more precise in explaining the context of the model and grounding it
nd
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in the real world (see the 2 and 3 paragraphs of the paper starting on page XXX) although in the interest of
keeping the paper a manageable length I kept it short. Footnote 3 and the new section on high income people also
relate the analysis to the true tax-subsidy structure as it exists.
Again, I think this line of inquiry shows real promise, and I appreciate the larger notion that we need to be thinking
about how policies affect costs by structuring individual choices.
Again, my thanks to the referee for the helpful and encouraging comments.