Properties of actuarially fair and pay-as-you-go health insurance schemes for the elderly. An OLG model approach.

The aged dependency ratio or ADR is growing at a fast pace in many countries. This fact causes stress to the economy and might create conflicts of interest between young and old. In this paper the properties of different health insurance systems for the elderly are analysed within an overlapping generations (OLG) model. The properties of actuarial health insurance and different variations of pay-as-you-go (PAYG) health insurance are compared. It turns out that the welfare properties of these contracts are heavily dependent on the economy's dynamic properties. Of particular importance is the magnitude of the rate of population growth relative to the interest rate. In addition, it is shown that public health insurance is associated with an inherent externality resulting in a second-best solution.