Financing Universal Health Care : Premiums or Payroll Taxes?

This paper presents an overlapping generations model where agents face labor-income and health risks in order to quantify the macroeconomic and welfare consequences of reform options for the German health care system. In addition to labor supply, consumption and savings, households also choose health investments with skill-specific productivity in order to improve their health status and longevity. The initial equilibrium reflects the current public and private mixture of health care in Germany with different treatment qualities and health care costs and a significant difference in intra-cohort life expectancy. Then we simulate the transition towards a uniform system with either funded or unfunded premiums or payroll taxes.Our simulations results highlight the favorable insurance properties of payroll taxes that may compensate their negative impact on labor supply when risk aversion is high or labor supply elasticity is low. We also find that the transition towards a funded system is slow and expensive, so that unfunded premiums may be preferred on efficiency reasons. Finally, despite significant moral hazard costs of full coverage, compulsory deductibles will not improve aggregate welfare in our model