August 2014

IZA DP No. 8386: Health Effects of Containing Moral Hazard: Evidence from Disability Insurance Reform

published in: Health Economics, 2018, 27 (3), 606-621.

We exploit an age discontinuity in a Dutch disability insurance (DI) reform to identify the health impact of stricter eligibility criteria and reduced generosity. Our results show substantial adverse effects on life expectancy for women subject to the more stringent criteria. A €1,000 reduction in annual benefits leads to a 2.4 percentage points higher probability of death more than 10 years after the reform. This negative health effect is restricted to women with low pre-disability earnings. We find that the mortality rate of men subject to the stricter rules is reduced by 0.7 percentage points. We hypothesize that the gender difference in health outcomes is due to the reform tightening eligibility particularly with respect to mental health conditions, which are more prevalent among female DI claimants. The evidence for the existence of substantial health effects implies that policy makers considering a DI reform should carefully balance the welfare gains from reduced moral hazard against losses not only from less coverage of income risks but also from deteriorated health.