Optimal Health Insurance and the Distortionary Effects of the Tax Subsidy
29 Pages Posted: 6 Feb 2013 Last revised: 17 Apr 2013
Date Written: December 19, 2012
Abstract
This paper introduces a model of optimal health insurance. This model provides theoretical guidance of the relationship between household preferences, cost-sharing, and premiums. It applies this model to understand how the income tax subsidy distorts optimal cost-sharing in health insurance. Typically, insurance protects individuals from financial risk. Health insurance plans, however, are frequently designed to provide coverage at non-catastrophic levels of financial loss. The presence of a health insurance subsidy in the United States tax code, which enables individuals to pay premiums in pre-tax dollars, encourages the purchase of more generous health insurance plans. Little is known about how the tax subsidy affects preferences for the structure of cost-sharing in private plans. This model illustrates how the tax subsidy can distort the optimal cost-sharing schedule. The model is tested empirically using claims data in the Medical Expenditure Panel Survey and a regression discontinuity strategy that uses discrete changes in the marginal tax rate at the Social Security taxable maximum for identification.
Keywords: optimal health insurance, income taxes, cost sharing
JEL Classification: H24, H31, I13
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Health Insurance, Labor Supply, and Job Mobility: A Critical Review of the Literature
-
Recent Trends in Employer-Sponsored Health Insurance Coverage: are Bad Jobs Getting Worse?
By Henry S. Farber and Helen Levy
-
Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed
By Jonathan Gruber and James M. Poterba
-
Employment-Based Health Insurance and Job Mobility: Is There Evidence of Job-Lock?
-
Subsidies to Employee Health Insurance Premiums and the Health Insurance Market
-
How Elastic is the Firm's Demand for Health Insurance?
By Jonathan Gruber and Michael Lettau
-
Limited Insurance Portability and Job Mobility: The Effects of Public Policy on Job-Lock
-
Health Insurance and Early Retirement: Evidence from the Availability of Continuation Coverage
-
Why Did Employee Health Insurance Contributions Rise?
By Jonathan Gruber and Robin Mcknight