27 Pages Posted: 14 Sep 2007
Date Written: August 23, 2007
Employer-financed health insurance systems, like that used in the United States, distort firms labor demand and adversely affect the economy. Since such costs vary with employment rather than hours worked, firms have an incentive to increase output by increasing worker hours rather than employment. Given that the returns to employment exceed the returns to hours worked, this results in lower levels of employment and output. In this paper we construct a heterogeneous agent general equilibrium model where individuals differ with respect to their productivity and employment opportunities. Calibrating the model to the U.S. economy, we generate steady state results for several alternative models for financing health insurance: one in which health insurance is financed primarily through employer contributions that vary with employment; a second where insurance is funded through a non-distortionary, lump-sum tax; and a third where insurance is funded by a payroll tax. We measure the effects of each of the alternatives on output, employment, hours worked and inequality.
Keywords: employer-based health insurance, general equilibrium, healthcare reform
JEL Classification: E62, O41, C68
Suggested Citation: Suggested Citation
DeLoach, Stephen B. and Platania, Jennifer M., The Macroeconomic Consequences of Financing Health Insurance (August 23, 2007). Available at SSRN: https://ssrn.com/abstract=1013451 or http://dx.doi.org/10.2139/ssrn.1013451