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

Ponpoje Porapakkarm and Svetlana Pashchenko

No 1086, 2013 Meeting Papers from Society for Economic Dynamics

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 the 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 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 a 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 only one third of the current costs.

Date: 2013
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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 (2016)
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:red:sed013:1086

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