Employment-based Health Insurance and Misallocation: Implications for the Macroeconomy

David Chivers, Zhigang Feng and Anne Villamil
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Anne Villamil: University of Iowa

Review of Economic Dynamics, 2017, vol. 23, 125-149

Abstract: Most working-age Americans obtain health insurance through the workplace. U.S. law requires employers to use a common price, but the value of insurance varies with idiosyncratic health risk. Hence, linking employment and health insurance creates a wedge between the marginal cost and benefit of insurance. We study the impact of this wedge on occupational choice and welfare in a general equilibrium model. Agents face idiosyncratic health expenditure shocks, have heterogeneous managerial and worker productivity, and choose whether to be workers or entrepreneurs. First, we consider a private insurance indemnity policy that removes the link between employment and health insurance, so only ability matters for occupational choice. By construction, this is the most efficient policy. We find a welfare gain of 2.28% from decoupling health insurance and employment. Second, we tighten the link by increasing employment-based health insurance from the current level of 62% to 100%, and find a welfare loss of - 0.61%. (Copyright: Elsevier)

Keywords: Health insurance; Occupational choice; Entrepreneur; Misallocation; Uncertainty; Heterogeneity; Mandate; Patient protection; Affordable care act (search for similar items in EconPapers)
JEL-codes: E23 I10 O40 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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DOI: 10.1016/j.red.2016.09.002

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