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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: health insurance, tax subsidies, risk sharing, general equilibrium
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets; D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; I - Health, Education, and Welfare > I1 - Health > I10 - General

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