As a major topic of debate in the United States, health care reform is a primary cause for economic policy uncertainty. At the same time, medical expenditures are an increasingly important contributor to households’ financial risk due to rising costs of treatment. Despite its apparent importance, this study is the first to assess the effect of health care policy uncertainty on households. I develop a simple theoretical model that predicts a negative effect of health care policy uncertainty on consumption and relative demand for risky financial assets. The model also illustrates that the health care policy uncertainty effect can be expected to increase with bad health. Using the HRS’ rich longitudinal data on older Americans and Baker et al.’s (2016) recently developed health care policy uncertainty index, these claims are tested using Honor´e’s (1992) semiparametric fixed effect censored regression estimator, a concomitant-variable latent class Tobit model, and a Tobit model-based recursive partitioning procedure. The results do not indicate an economically relevant effect of health care policy uncertainty on households’ consumption. However, I find substantial empirical evidence for an important effect on households’ portfolio choice and suggestive evidence that the effect is increasing in households’ health problems. These results are robust to model specification and do not appear to be caused by potentially endogenous household characteristics (e.g., wealth) or confounding types of uncertainty (e.g., business cycle uncertainty).

Additional Metadata
Persistent URL hdl.handle.net/2105/43925
Series Econometrie
Citation
Wiemann, T.T., & Lumsdaine, R.L. (2018, November 7). Health Care Policy Uncertainty in the United States and its Effect on Households\' Consumption and Portfolio Choice. Econometrie. Retrieved from http://hdl.handle.net/2105/43925