Income Responses to Health Insurance Subsidies: Evidence from Massachusetts

This paper analyzes income responses to the eligibility thresholds of health insurance subsidies under the Massachusetts reform, the state-level precursor to the national health-care reform in the United States. Using data from the American Community Survey, I test whether individuals adjusted their income in order to qualify for the subsidies. I find clear evidence of income manipulation around the threshold of 300 percent of federal poverty level (FPL), and some evidence of income manipulation around 150 percent of FPL. The higher threshold determines the eligibility for any insurance subsidy, and the effect is concentrated among wage workers. The lower threshold determines whether the individuals pay zero or positive out-of-pocket premiums, and the effect is concentrated among the self-employed. I also use a structural model to estimate the labor supply elasticity with respect to the wage rate based on the changes of income, and assess the social welfare impacts. The results suggest that the labor supply elasticity is close to zero, and the welfare loss is modest relative to the size of the program.