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

  • Ponpoje (Poe) Porapakkarm

    (University of Macau)

  • Svetlana Pashchenko

    (Uppsala University)

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.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1086.

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Date of creation: 2013
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Handle: RePEc:red:sed013:1086
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