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

Author

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  • Pashchenko, Svetlana
  • Porapakkarm, Ponpoje
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.

Suggested Citation

  • Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2013. "Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform," MPRA Paper 72671, University Library of Munich, Germany, revised 17 May 2016.
    • Handle: RePEc:pra:mprapa:72671
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    References listed on IDEAS

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    Cited by:

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    2. Vegard M. Nygaard & Gajendran Raveendranathan, 2021. "The impact of U.S. employer-sponsored insurance in the 20th century," Department of Economics Working Papers 2021-11, McMaster University.

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    More about this item

    Keywords

    health insurance; tax subsidies; tax deductions; general equilibrium; life-cycle; health reform;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I10 - Health, Education, and Welfare - - Health - - - General

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