Is There “Too Much” Inequality in Health Spending Across Income Groups?∗

In this paper we study the efficient allocation of health resources across individuals. We focus on the relation between health resources and income. In particular we determine the efficient level of the health care social safety net for the indigent. We assume that individuals have different life cycle profiles of productivity. Health care increases survival probability. We adopt the classical approach of welfare economics by considering how a central planner with an egalitarian (ex-ante) perspective would allocate resources. We show that, under the efficient allocation, health care spending increases with labor productivity, but only during the working years. Post retirement, everyone would get the same health care. Quantitatively, we find that the amount of inequality across the income distribution in the data is of the same magnitude as what would be justified solely on the basis of production efficiency. As a rough summary, in U.S. data the top to bottom income quartile spending ratio is about 1.3 for most of the working life, dropping to 1 at retirement. Efficiency implies a steady decline from about 1.3 (at age 25) to 1 at retirement. We find larger inefficiencies in the lower part of the income distribution and ages between 50 to 65. JEL Classification: I14, H21, E60.