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Chapter 4 Health Insurance and the Transition to Adulthood HELEN LEVY A bout one in six Americans had no health insurance in 2005 (DeNavas -Walt, Proctor, and Lee 2006). Not surprisingly, the uninsured tend to be poorer than the insured (Institute of Medicine 2001). They are also younger. In fact, one-half of all uninsured adults are between the ages of eighteen and thirty-four (author’s calculations based on DeNavas-Walt et al. 2006, table 8). Even though young adults have the highest rates of uninsurance of any age group, very little research has focused on their health insurance coverage.1 Nor has any of the research on the transition to adulthood examined health insurance coverage. This is surprising because health insurance seems like an excellent marker of adulthood, given that it is closely tied to other frequently studied outcomes , such as employment stability. Most teenagers are covered as dependents on a parent’s private insurance policy; Medicaid covers a substantial fraction as well. But at some point eligibility for this coverage runs out, and young adults must find health insurance on their own. This passage may be rocky, either because of problems with insurance markets or because of conditions that characterize the transition to adulthood, such as weak attachment to the labor force. Health insurance coverage in the United States is closely linked to employment , with health insurance more likely to be provided as a fringe benefit of a long-term, full-time job (Farber and Levy 2000). Of course, these are exactly the jobs that young adults may take some time to find (for details, see Yates 2005). We also know that the transition from school to stable employment can take a surprisingly long time. For example, Julie Yates (2005) documents that the median worker takes nearly a year after first 84 leaving school to start a job that will last for at least one year. For the median high school dropout, it takes more than three years. The consequences of high job mobility for health insurance coverage are clear: nonworkers are much more likely than workers to be uninsured. Even among workers, low-tenure jobs are much less likely to provide health insurance (Farber and Levy 2000). It may be, then, that this period of financial instability is the reason for higher rates of uninsurance among young adults. On the other hand, markets for health insurance may suffer from imperfections that lead young adults, who are relatively healthy, to face prices for insurance that are actuarially unfair, resulting in lower demand for coverage. This could occur either because of information asymmetries in the insurance market or because of regulation-induced distortions in the market. In the first scenario, a classic case of “adverse selection,” insurance companies may have less information than consumers about risk, and therefore the low-risk individuals (in this case, young adults) are not fully insured (or in this case, they are uninsured) (Rothschild and Stiglitz 1976). In the second scenario, community rating requirements may limit insurers’ ability to vary premiums by individual, which results in the same problem as information asymmetries: young adults face actuarially unfair prices and therefore do not buy insurance. This could also be caused by the de facto community rating that employers appear to practice (Pauly and Herring 1999). However, James Cardon and Igal Hendel (2001), in the only study that tests directly for adverse selection in health insurance markets, find no evidence of adverse selection.2 This chapter analyzes the trajectories of young adults’ health insurance coverage and offers some insight into the reasons why so many young adults experience gaps in coverage. Understanding how much “financial immaturity” (lack of job stability, for example) can explain high rates of uninsurance among young adults has important implications for public policy. If financial immaturity explains young adults’ failure to obtain coverage, then policies aimed at making coverage available to them, such as increasing the maximum age of eligibility for dependent coverage, may be met with a blank stare reminiscent of adolescence . Mandates or further expansions of public coverage, both of which take the decision about coverage out of the hands of the young adults, may be necessary to cover them in this case. The chapter begins by describing the life-cycle profiles of health insurance coverage for men and women from childhood through age thirty-five. I also estimate the flows between different types of coverage (private, public, none) to shed light on the dynamics of gaps in coverage...

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