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

Svetlana Pashchenko and Ponpoje Porapakkarm

MPRA Paper from University Library of Munich, Germany

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.

Keywords: health insurance; tax subsidies; tax deductions; general equilibrium; life-cycle; health reform (search for similar items in EconPapers)
JEL-codes: D52 D91 E2 E21 E65 H20 I10 (search for similar items in EconPapers)
Date: 2013-05-08, Revised 2016-05-17
New Economics Papers: this item is included in nep-dge, nep-hea, nep-ias, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Cross-Subsidization in Employer-Based Health Insurance and the Effects of Tax Subsidy Reform (2016)
Working Paper: Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform (2013)
Working Paper: Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:72671

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