The High Cost of Partial Insurance: Moral Hazard and the Health Care Consumption

Ten percent of teenagers become ineligible for their families’ health insurance coverage on their nineteenth birthdays. Due to the federal Emergency Medical Treatment and Active Labor Act, however, they do not lose access to free emergency room (ER) care. Working from a simple theoretical framework, I exploit the discontinuity in health coverage at age nineteen to assess the effect of partial insurance on healthcare consumption and expenditure. Using a unique database of 15 million hospital discharge records, I find that ER usage rises discontinuously at age nineteen, particularly for minorities and residents of low-income zip codes. As predicted by the conceptual model, the jump in ER utilization at age nineteen is disproportionately driven by ailments that physicians classify as inappropriate for ER care, indicative of medical mismanagement. I also find suggestive evidence that health care expenditures outside of the ER decline. A large share of the increase in ER utilization at age nineteen takes the form of uncompensated care, the cost of which is born by third parties. These findings constitute some of the first evidence on how the incentives faced by the uninsured affect medical expenditure, revealing that mandated access to free emergency room care generates significant moral hazard and cost shifting.