Are tax subsidies for private medical insurance self-financing? Evidence from a microsimulation model for outpatient and inpatient episodes

This paper analyses whether or not tax subsidies to private medical insurance are self-financing by means of a structural approach. We construct a simulation routine based on a microeconometric discrete choice model that allows us to evaluate the impact of premium changes on the utilisation of outpatient and inpatient health care services. We simulate the 1999 Spanish tax reform that abolished the tax deduction for expenditures on private health insurance using a representative sample of the Catalan population. Prior to this reform, foregone tax revenue arising from deductions after the purchase of private insurance amounted to €69.2 M. per year. In contrast, the elimination of the subsidies to private policies is estimated to generate an extra cost for the public sector of about €8.9 M. per year.