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 countrie s. This fact causes stress to the economy and might create conflicts of int erest between young and old. In this paper the properties of different heal th insurance systems for the elderly are analysed within an overlapping gen erations (OLG) model. The properties of actuarial health insurance and diff erent variations of pay-as-you-go (PAYG) health insurance are compared. It turns out that the welfare properties of these contracts are heavily depend ent on the economy's dynamic properties. Of particular importance is the ma gnitude of the rate of population growth relative to the interest rate. In addition, it is shown that public health insurance is associated with an in herent externality resulting in a second-best solution. (C) 2000 Elsevier S cience B.V. All rights reserved.