Association for Public Policy Analysis & Management

In this paper, we use the health insurance coverage expansion under the 2010 Affordable Care Act's (ACA) dependent coverage mandate to empirically test how reduced risk of health related financial expenses affects young adult household consumption and borrowing decisions. Utilizing the buffer stock theory of savings and consumption, we hypothesize that the provision of health insurance may allow young adults to hold less in precautionary savings and increase their borrowing and consumption. Our empirical results show that young adults both increased their borrowing on credit cards and auto loans and increased their expenditures in a number of different durable and non-durable goods categories. We conclude that a reduction in medical expenditure risk due to insurance coverage may allow young adults to expand their consumption and borrowing and accept additional financial risks.

The ACA was enacted by Congress in March 2010 and the dependent coverage provision of the ACA took effect in September 2010. The law required family health insurance plans to cover dependents of insured individuals until age 26. After the mandate was implemented, the share of uninsured individuals aged 19-25 fell by 9.5 percent, and the share that received coverage as dependents increased by 43.6 percent (Akosa Antwi et al., 2013).

To examine how the provision of health insurance may affect borrowing of young adults, we use detailed consumer credit information from the Federal Reserve Bank of NY/Equifax Consumer Credit Panel (CCP) from 2009-2013. We supplement data from the CCP with expenditure data from the Consumer Expenditure Survey (CEX) from 2008-2013 to measure how the mandate affected consumer spending. To identify the effect of the mandate, we restrict both data sets to only include individuals born in 1982-1983 and 1985-1986. Young adults born in 1985-1986 were ages 24-25 when the mandate was implemented and serve as a treatment group, while individuals born in 1982-1983 serve as a control group.

Utilizing a standard differences-in-differences approach, evidence from the CCP shows that covered young adults applied for more credit after the mandate than control group individuals. Individuals affected by the law increased their number of active credit cards and credit card balances, while lenders provided these individuals with larger lines of credit. The estimates also suggest qualitatively similar effects in auto loans, with increases in the number of auto loans and balances. We also observe that total auto loan size increased after the law implementation.

Preliminary results from the CEX imply that young adults decreased their expenditures on health insurance and medical care while increasing their expenditures in a number of categories, including on automobiles, food away from home, entertainment, and travel. However, our results are imprecisely estimated, implying that while we cannot reject the hypothesis that there is no change in expenditures, it is likely there is significant heterogeneity in which young adult household increase their expenditures after receiving health insurance coverage. Our results are consistent with other recent research that has shown that health insurance coverage has important financial consequences outside of implications on health and access to care.