CROSS-SUBSIDIZATION IN EMPLOYER-BASED HEALTH INSURANCE AND THE EFFECTS OF TAX SUBSIDY REFORM

Every individual buying employer-based health insurance receives a tax subsidy because premiums are excluded from taxable income. Since these premiums are independent of individual risk, high-risk individuals also receive implicit crosssubsidies from low-risk individuals. In this paper, we explore w...

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Bibliographic Details
Published in:National tax journal 2016-09, Vol.69 (3), p.583-611
Main Authors: Pashchenko, Svetlana, Porapakkarm, Ponpoje
Format: Article
Language:English
Subjects:
Group insurance
Health insurance
Impact analysis
Influence
Insurance pools
Management
Studies
Subsidies
Tax expenditures
Tax incentives
Tax reform
Taxation
United States
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Summary:Every individual buying employer-based health insurance receives a tax subsidy because premiums are excluded from taxable income. Since these premiums are independent of individual risk, high-risk individuals also receive implicit crosssubsidies from low-risk individuals. In this paper, we explore ways to reform the tax subsidy by taking this implicit cross-subsidization into account Using a general equilibrium model, we find that targeting the tax subsidy can result in substantial savings. Specifically, the same level of risk-sharing can be achieved at one-third of current costs if the tax subsidy is targeted only toward low-risk individuals and premiums are age-adjusted.
ISSN:0028-0283
1944-7477
DOI:10.17310/ntj.2016.3.04