Federal Reserve Bank of Philadelphia Consumer Finance Institute: 'Health Insurance and Young Adult Financial Distress'

PHILADELPHIA, Pennsylvania, Aug. 24 (TNSRep) -- The Federal Reserve Bank of Philadelphia's Consumer Finance Institute issued a white paper (No. 19-54) on Aug. 23, 2022, entitled "Health Insurance and Young Adult Financial Distress."

The working paper was written by senior research fellow Nathan Blascak and advisor and research fellow Slava Mikhed.

Here are excerpts:

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Abstract

We study how health-insurance eligibility affects financial distress for young adults using the Affordable Care Act's (ACA) dependent coverage mandate -- the part of the ACA that requires private health-insurance plans to cover individuals up to their 26th birthday. We examine the effects of both gaining and losing eligibility by exploiting the mandate's implementation in 2010 and its automatic disenrollment mechanism at age 26. Our estimates show that increasing access to health insurance lowers young adults' out-of-pocket medical expenditures and debt in third-party collections. However, reductions in financial distress are transitory, as they diminish after an individual loses access to parental insurance when they age out of the mandate at age 26.

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INTRODUCTION

Although younger individuals are one of the healthiest demographic groups in the U.S., with a low incidence of chronic diseases and declining rates of tobacco and alcohol use,/1 they are a population at high risk of financial distress because of medical expenditures. This is because young adults (YAs) have one the highest uninsured rates of any age group in the U.S. (15% in 2019 for individuals ages 19-25), and they own few assets while also holding relatively high levels of nonmortgage debt. This combination of low insured rate and limited ability to borrow implies that even a small medical shock could have serious negative financial consequences, further straining young adults' balance sheets. While numerous studies have shown that health insurance improves financial outcomes for low-income and older adults, less is known how insurance coverage affects younger adults' financial outcomes.

This paper addresses this gap in the literature by exploiting the Affordable Care Act's (ACA) dependent coverage mandate (DCM) to assess the impact of having access to health insurance on the financial outcomes of YAs. The DCM is a unique policy change in that it (1) requires that all private health-insurance plans offering dependent coverage policies in the U.S. cover older children up to the age of 26, and (2) makes YAs automatically ineligible for dependent coverage after they turn age 26. Because of the specific features of the DCM, we can observe individuals both becoming eligible and ineligible for health insurance during our sample period. This agebased eligibility criteria allows us to use different empirical approaches to examine how financial distress changes as individuals vary in their eligibility for health insurance.

To study how health insurance affects younger adults' financial outcomes, we first use the passage of the mandate and its age eligibility rule to formulate a standard differences-indifferences (DID) event study design to estimate the financial effects of gaining access to health insurance. We use this DID framework and compare the financial outcomes of YAs ages 23 25 to outcomes of individuals ages 27 29 before and after the DCM's implementation in 2010./2 Second, to estimate the effects of losing insurance access under the DCM, we exploit the aspect of the mandate that limits insurance coverage to dependents up to their 26th birthday. Because of the introduction of a national age-based cutoff, we may expect to see differences in the age dynamics in financial outcomes before and after the implementation of the DCM. We take advantage of this age-based mechanism and compare financial outcomes across ages before and after the ACA's implementation.

Similar to other recent studies on the financial effects of health-insurance policy changes (Argys, Friedson, Pitts, and Tello-Trillo, 2020; Brevoort, Grodzicki, and Hackmann, 2020; Hu, Kaestner,

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1/ According to the Substance Abuse and Mental Health Services Administration (SAMHSA), 19.1% of young people ages 18 25 reported cigarette use in the past month, and 55.1% reported alcohol use in the past month in 2018. Both of these figures represent the lowest-recorded usage rates since 2002. Opioid misuse is also down, with 5.6% of young adults reporting opioid misuse in 2018, a 3.1% decline since 2015. For more information, see SAMHSA (2019).

2/ We intentionally omit individuals who are age 26 because they will be partially treated (i.e., eligible to be covered by the DCM) in the year they turn 26.

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Mazumder, Miller, and Wong, 2018; Mazumder and Miller, 2016),/3 we use anonymized individual-level credit report data. These data are well suited for assessing financial distress; they contain detailed records of these individuals' financial information over time. We also use data from the Medical Expenditure Panel Survey (MEPS) to assess the effect of access to health insurance on medical expenditures, out-of-pocket (OOP) expenditures, and the probability of incurring large OOP medical expenditures. The MEPS has been previously used by Chua and Sommers (2014) and Chen, Vargas-Bustamante, and Novak (2017) to assess the effect of the passage of the ACA's DCM on OOP expenses, showing that its implementation led to a 14% decrease in annual health-care expenditures and an 18% 21% decrease in OOP expenditures.

The results in the first part of the paper show that access to health insurance lowers financial distress for young individuals. Using the MEPS data, we confirm previous studies' results that have found that OOP medical expenditures declined for individuals covered by the mandate. We also find that these individuals have a lower probability of incurring very large OOP medical expenditures, which is consistent with health insurance limiting medical expenditure risk. Results from the credit report data show that the introduction of the mandate reduced the probability of having debt in third-party collections, the number of third-party collections, and the amount of debt in third-party collections. By 2012, YAs eligible to be covered by the DCM experienced a 0.9 percentage point (7.4%) decline in the probability of having an account in collections and a $75 decline (10.5%) in the amount of debt in collections.

These results are consistent with our heterogeneity analysis findings that declines in third-party collections are primarily concentrated in the far-right tail of the collection balance distribution. Results from estimating conditional quantile regression event study models indicate that declines in debt in third-party collections start at the 95th percentile and are economically significant. At the 99th percentile of debt in third-party collections, we estimate a decline of $728 by 2013.We also find that YAs living in counties with high uninsured rates prior to the passage of the mandate experienced the largest declines in financial distress. This result is in-line with recent research showing that place-based factors play a role in the incidence of financial distress (Goldsmith-Pinkham, Pinkovskiy, and Wallace, 2020; Keys, Mahoney, and Yang, 2020).

Our results in the second half of the paper indicate that after an individual ages out of the mandate's coverage at age 26, financial distress increases along a number of different measures. Using MEPS data, we observe that the percent of total medical expenses paid OOP are 5 percentage points higher for individuals who turn age 26 in the postmandate period (after 2010), compared with individuals who turn age 26 and older in the premandate period (before 2010). Results from the credit report data show that individuals turning age 26 and older in the postmandate period are 4% more likely to have an account in collections and have more accounts sent to third-party debt collectors. We also see that collection balances in the right tail of the distribution increase in size for YAs older than 26, with collection balances at the 99th percentile increasing by over $300. These results are consistent with findings from Dahlen (2015), who finds a 15.4 percentage point increase in the share of YAs with worse health-insurance coverage after they aged out of the mandate, and Batty, Gibbs, and Ippolito (2018), who document that

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3/ Other studies focusing on the effect of health insurance on financial outcomes include Barcellos and Jacobson (2015) and Gross and Notowidigdo (2011).

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medical bills in collections are highest for YAs in their late 20s. Our findings may also suggest that the quality of health insurance, in addition to access, is important for financial outcomes.

This paper makes three contributions to the existing literature. First, we add to a growing body of literature that has analyzed the effects of the ACA's dependent coverage mandate on a number of different margins, including employment (Bailey and Chorniy, 2016; Heim, Lurie, and Simon, 2018), self-employment (Bailey, 2017), and health and health-care utilization outcomes (Akosa Antwi, Moriya, and Simon, 2015; Barbaresco, Courtemanche, and Qi, 2015). Second, unlike previous studies of changes in health-insurance policies that have used credit report information and public health-insurance expansions, we analyze the effect of a government-mandated expansion in private insurance coverage on financial outcomes of intended beneficiaries, not public insurance programs such as Medicaid or the Massachusetts health-care reform. Given the policy uncertainty surrounding health care, we believe it is important to assess the effects of various health-insurance policies implemented in recent years on the financial outcomes of their target populations. Third, we estimate both the effect of enrollment in health-insurance coverage and the consequences of an automatic disenrollment from insurance coverage after young adults age out of the mandate at age 26.

This paper also adds to the literature on the effect of public policies on the financial outcomes of YAs. While there are recent studies examining the effects of financial education mandates (Brown, Grigsby, van der Klaauw, Wen, and Zafar, 2016) and credit card restrictions (Debbaut, Ghent, and Kudlyak, 2016) on financial outcomes of young individuals, the financial response of this population group to health-insurance coverage is not well documented. Given that young adults in the U.S. still experience high levels of uninsurance and are financially vulnerable because of low income and high unemployment, it is important to understand this response.

Overall, our results indicate that the expanding health insurance to young adults leads to material improvements in their financial well-being, while losing eligibility worsens it. This is consistent with the recent literature that has shown that assessments of welfare effects of health-care policy should account for the effect on individuals' personal finances as well as such factors as labor market outcomes. It is important to note that, because we observe only if young adults are eligible to be covered by the mandate, not if they actually gained health-insurance coverage, our estimates measure the intent-to-treat (ITT) effects of the DCM. This implies that our estimates of the mandate's effect on treated individuals are more conservative than the treatment effects for individuals who actually received health insurance through the mandate. This is because we average the effects across eligible individuals who actually received health insurance through their parents' plans and those who did not.

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DISCUSSION AND CONCLUSION

The results from this analysis contribute to the growing body of studies that leverage consumer credit and medical expenditure data sets to analyze the effects of health-insurance policy on financial outcomes. Using the implementation of the ACA's DCM in 2010 and its automatic disenrollment mechanism at age 26 to identify the effects of health insurance on young adults, we find that the increased access to health insurance reduced financial distress for young adult dependents. In particular, we observe declines in the probability of having debt in collections, the number of accounts and balance in collections, the amount of OOP medical expenses, and in the probability of incurring very large medical expenditures. We also find that individuals living in areas with high uninsured rates prior to the enactment of the mandate experienced greater declines in financial distress than those who lived in low uninsured-rate counties. These results suggest that the mandate was effective in geographic areas with the highest percentage of individuals likely to be affected.

Our results in the second half of the paper suggest that financial distress increases once individuals age out of the DCM after age 26, with the probability of having debt in collections and the size of large collection balances both increasing. These increases are not surprising given that many young adults either transition to lower quality plans or become uninsured after losing access to parental insurance. That financial distress worsens upon losing parental insurance coverage indicates that young adults (1) receive material financial protections from health insurance, although they are relatively healthy and use health-care services at lower rates, and (2) did not receive the same amount of financial protection when transitioning from the DCM to either their own individual health-insurance plans or losing their coverage entirely. In addition, the magnitude of the effects we estimate imply that the financial effects of gaining and losing access to health insurance for young adults are not symmetric. These findings also suggest that the quality of health insurance plays an important role in the financial protection of covered individuals.

Our estimates provide additional context when evaluating the welfare aspects of the ACA's DCM. Specifically, we are able to evaluate the effect of a private health-insurance expansion on financial distress, which represents an important contribution to the existing literature, as a majority of other studies that have examined the effect of health-insurance policy on financial distress have focused on public health-insurance expansions. This distinction has direct implications on the welfare effects of this law, as the efficiency of the mandate, as opposed to public finance considerations, will dictate the incidence of its cost. Depew and Bailey (2015) show that, while family plan premiums increased by 2.5%-2.7% after the DCM was implemented, employee contributions did not experience a statistically significant increase. This implies that, while employers saw increased costs, they did not pass the cost of the coverage on to workers. Since employee contributions did not change, it is possible that employers passed on the costs through other means, such as wage reductions, instead of increased insurance contributions. If this is the case, this would decrease the total welfare benefit of the DCM.

While young adults may not bear the entire cost of the mandate, the benefits from reducing their financial distress can be significant. Brevoort et al. (2020) provide a theoretical framework that shows how reductions in delinquent medical debt can improve consumer welfare. Reductions in financial distress for young adults may also reduce the financial burden of parents who provide financial support to their children. Finally, since these young adults are at the beginning stages of the life cycle, reducing current financial burdens and/or the probability of incurring large amounts of medical debt may have significant long-run implications. Our results provide an important first step in understanding these dynamics by empirically identifying these effects.

The results of this analysis also have important policy implications. We contribute to the growing body of evidence that the provision of health insurance may generate important, welfare-enhancing benefits beyond providing access to health care or reducing OOP costs. If policymakers are to properly assess the expansion or contraction of health insurance, they need to consider the effect of providing or removing health insurance on the financial outcomes of individuals, not just measures of physical health and access to health care.

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The working paper is posted at https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2019/wp19-54.pdf