Cross-Subsidization in Employer-Based Health Insurance and the Effects of Tax Subsidy Reform
42 Pages Posted: 7 Jul 2013 Last revised: 22 Jul 2016
Date Written: March 19, 2016
Abstract
A major source of insurance coverage for non-elderly adults in the US is employer-based health insurance market. Every participant of this market gets a tax subsidy since premiums are excluded from taxable income. However, people have different incentives to participate in the employer-based pool – since premiums are independent of individual risk, high-risk individuals receive implicit cross-subsidies from low-risk individuals. In this paper we explore several ways to reform the tax subsidy by taking this implicit cross-subsidization into account. We construct a general equilibrium heterogeneous agents model and calibrate it using the Medical Expenditure Panel Survey Dataset. We find that even though the complete elimination of the tax subsidy leads to the unraveling of the employer-based pool, there is still room for substantial savings by targeting the tax subsidy. More specifically, the same level of risk-sharing in the employer-based market can be achieved at one third of the current costs if i) the tax subsidy is targeted only towards low-risk people who have weak incentives to participate in the pool, and ii) employer-based insurance premiums become age-adjusted. To improve welfare outcome of this reform the tax subsidy should also be extended to low-income individuals.
Keywords: health insurance, tax subsidies, risk sharing, general equilibrium
JEL Classification: D52, D91, E21, E65, H20, I10
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
U.S. Tax Policy and Health Insurance Demand: Can a Regressive Policy Improve Welfare?
By Karsten Jeske and Sagiri Kitao
-
On the Rise of Health Spending and Longevity
By Raquel Fonseca, Pierre-carl Michaud, ...
-
On the Rise of Health Spending and Longevity
By Pierre-carl Michaud, Raquel Fonseca, ...
-
Macroeconomic Consequences of Alternative Reforms to the Health Insurance System in the U.S.
By Zhigang Feng
-
Health Investment Over the Life-Cycle
By Timothy Halliday, Hui He, ...
-
Quantitative Analysis of Health Insurance Reform: Separating Regulation from Redistribution
-
The Macroeconomics of Health Savings Accounts
By Juergen Jung and Chung Tran
-
Health Care Financing Over the Life Cycle, Universal Medical Vouchers and Welfare
By Juergen Jung and Chung Tran
-
Health and Wealth in a Life Cycle Model
By John Karl Scholz and Ananth Seshadri