The Effect of Income-Based Mandates on the Demand for Private Hospital Insurance and its Dynamics

38 Pages Posted: 9 Jan 2020

See all articles by Thomas Buchmueller

Thomas Buchmueller

University of Michigan

Terence C Cheng

University of Adelaide, School of Economics

Ngoc Pham

Housing and Healthy Cities

Kevin E. Staub

University of Melbourne - Department of Economics; IZA Institute of Labor Economics

Date Written: December 17, 2019

Abstract

We examine the effect of an income-based mandate on the demand for private hospital insurance and its dynamics in Australia. The mandate, known as the Medicare Levy Surcharge (MLS), is a levy on taxable income that applies to high income individuals who choose not to buy private hospital insurance. Our identification strategy exploits changes in MLS liability arising from both year-to-year income fluctuations, and a reform where income thresholds were increased significantly. Using data from the Household, Income and Labour Dynamics in Australia longitudinal survey, we estimate dynamic panel data models that account for persistence in the decision to purchase insurance stemming from unobserved heterogeneity and state dependence. Our results indicate that being subject to the MLS penalty in a given year increases the probability of purchasing private hospital insurance by between 2 to 3 percent in that year. If subject to the penalty permanently, this probability grows further over the following years, reaching 13 percent after a decade. We also find evidence of a marked asymmetric effect of the MLS, where the effect of the penalty is about twice as large for individuals becoming liable compared with those going from being liable to not being liable. Our results further show that the mandate has a larger effect on individuals who are younger.

Keywords: Private health insurance, Insurance mandate, Panel data, Dynamic Models

JEL Classification: I11, I13, H42, C2

Suggested Citation

Buchmueller, Thomas and Cheng, Terence C and Pham, Ngoc and Staub, Kevin E., The Effect of Income-Based Mandates on the Demand for Private Hospital Insurance and its Dynamics (December 17, 2019). Available at SSRN: https://ssrn.com/abstract=3506380 or http://dx.doi.org/10.2139/ssrn.3506380

Thomas Buchmueller

University of Michigan ( email )

Terence C Cheng (Contact Author)

University of Adelaide, School of Economics ( email )

Level 3 and 4
10 Pulteney Street
Adelaide, South Australia 5000
Australia
61-8-83131175 (Phone)

Ngoc Pham

Housing and Healthy Cities ( email )

North Terrace Campus
Adelaide, South Australia 5005
Australia

Kevin E. Staub

University of Melbourne - Department of Economics ( email )

Melbourne, Victoria 3010
Australia

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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