Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/262385 
Year of Publication: 
2021
Series/Report no.: 
Upjohn Institute Working Paper No. 21-357
Publisher: 
W.E. Upjohn Institute for Employment Research, Kalamazoo, MI
Abstract: 
Arrow (1963) hypothesized that demand-side moral hazard induced by health insurance leads to supply-side expansions in healthcare markets. Capturing these effects empirically has been challenging, as non-marginal insurance expansions are rare and detailed data on healthcare labor and capital is sparse. We combine administrative labor market data with the geographic variation in the rollout of a universal insurance program-the introduction of long-term care (LTC) insurance in Germany in 1995-to document a substantial expansion of the inpatient LTC labor market in response to insurance expansion. A 10 percentage point expansion in the share of insured elderly leads to 0.05 (7%) more inpatient LTC firms and four (13%) more workers per 1,000 elderly in Germany. Wages did not rise, but the quality of newly hired workers declined. We find suggestive evidence of a reduction in old-age mortality. Using a machine learning algorithm, we characterize counterfactual labor market biographies of potential inpatient LTC hires, finding that the reform moved workers into LTC jobs from unemployment and out of the labor force rather than from other sectors of the economy. We estimate that employing these additional workers in LTC is socially efficient if patients value the care provided by these workers at least at 25% of the market price for care. We show conceptually that, in the spirit of Harberger (1971), in a second-best equilibrium in which supply-side labor markets do not clear at perfectly competitive wages, subsidies for healthcare consumption along with the associated demand-side moral hazard can be welfare-enhancing.
Subjects: 
long-term care
universal insurance expansion
Germany
LTC labor market
second-best efficiency
JEL: 
D61
I11
I13
J21
J23
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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