Paper by Thomas E. Getzen Presented by Charles Courtemanche

 Is health care a necessity or a luxury?  Necessity: In studies with U.S. individual-level data, the income elasticity of health care is near zero.  Luxury: In studies with country-level data, the income elasticity is often above 1.  See Table 1 p  Debate in literature

 This paper argues that health insurance can reconcile these apparently conflicting results.  Health care being an individual necessity and national luxury is consistent with a simple multilevel model:  First level: Nation’s health care budget is determined  Second level: Budget is divided among residents  Intuition: With full insurance, an increase in an individual’s income does not directly affect her personal utilization of care but adds to the nation’s budget, increasing everyone’s utilization of care.

 Individual-level estimates measure within-group variation while country-level estimates measure between-group variation.  With risk pooling, these won’t be the same.  Consider a “pooled group” where each member pays the same premium p and has health expenditures x that are fully paid for out of the pool.  Let P and X be the group totals.

 Case 1: N=1  An individual’s medical expenses are fully reflected by her premiums.

 Case 2: N=2  An individual’s medical expenses are only half reflected by her premiums.

 Case: N=n where n is large  An individual’s medical expenditures are decreasingly reflected by her premiums as n grows, converging to 0.

 Effects of income y on expenditures  Individual: Define allocation across individuals as  Aggregate:  These are very different.

 Natural setting for multilevel model because “the decision of how much of the total budget to allocate to a specific individual based on small scale micro factors (s) may be almost entirely separate from the large scale (L) macro factors determining the total constraint.”  Level 1:  Level 2:  See Figure 1 p. 263.

 Figure 1

 Seemingly paradoxical findings regarding the income elasticity of medical expenditures can be reconciled by the role pooled risk plays in the market for medical care.  Additional income doesn’t affect an insured individual’s budget constraint, but does affect the budget constraint of the health care system as a whole.  Multilevel modeling is useful in this context.