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

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  • Pashchenko, Svetlana
  • Porapakkarm, Ponpoje

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 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 the 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 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 people who have weak incentives to participate in the pool, and ii) employer-based insurance premiums become age-adjusted. To improve welfare outcome of this reform the tax subsidy should also be extended to low-income individuals.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48054.

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Date of creation: 08 May 2013
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Handle: RePEc:pra:mprapa:48054

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Keywords: health insurance; tax subsidies; risk sharing; general equilibrium;

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  1. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2011. "Welfare costs of reclassification risk in the health insurance market," MPRA Paper, University Library of Munich, Germany 34189, University Library of Munich, Germany.
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  13. Svetlana Pashchenko & Ponpoje Porapakkarm, 2013. "Quantitative Analysis of Health Insurance Reform: Separating Regulation from Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 383-404, July.
  14. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers, Georgetown University, Department of Economics gueconwpa~03-03-19, Georgetown University, Department of Economics.
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  16. Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(1), pages 36-41, January.
  17. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers, National Bureau of Economic Research, Inc 7995, National Bureau of Economic Research, Inc.
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