Most data sets indicate a positive correlation between having health insurance and utilizing health care services. Yet the direction of causality is not at all clear. If we observe a positive correlation between the utilization of health care services and insurance status, we do not know if this is because people who anticipate poor health buy more insurance (or take jobs with generous medical coverage), or because insurance lowers the cost of health care, increasing the quantity demanded.
While a few attempts have been made to implement an instrumental variables (IV) strategy to deal with endogeneity, the instruments chosen have not been entirely convincing. In this paper we revisit the IV estimation of the reduced form relationships between insurance and health care utilization taking advantage of what we argue is a good instrument— the individual’s self-employment status. Our main finding is that a positive and statistically significant effect of insurance continues to obtain even after instrumenting. Indeed, instrumental variables estimates of the impact of insurance on utilization of a variety of health care services are larger than their non-instrumented counterparts.
The validity of this
exercise depends on the extent to which self-employment status is a
suitable instrument. To argue this case, we analyze panel data on
transitions from wage-earning into self-employment and show that
individuals who select into self-employment do not differ
systematically from those who remain wage-earners with respect to
either the utilization of health care or health status. While this
finding does not prove that self-employment status is an appropriate
instrument, it is encouraging that there appear to be no underlying
differences that might lead to self-employment