Munich Personal RePEc Archive

Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform

Pashchenko, Svetlana and Porapakkarm, Ponpoje (2013): Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform.

[img]
Preview
PDF
MPRA_paper_72671.pdf

Download (354kB) | Preview

Abstract

A major source of insurance coverage for non-elderly adults in the US is the employer-based health insurance market. Every participant in this market receives a tax subsidy because 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. Using a general equilibrium heterogeneous agents model, 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 individuals who have weak incentives to participate in the pool, and ii) employer-based insurance premiums become age-adjusted. To improve the welfare outcome of this reform, the modified tax subsidy should also be targeted to low-income individuals.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.