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Cautionary Note
The only broad-based private health insurance systems that have ever existed anywhere have been based on employer-sponsored coverage and have provided favorable tax treatment of this coverage.
Concerns about the Tax Subsidy
• Larger direct subsidy for those in higher tax brackets
• Larger subsidy for those with more costly plans
• Differentially encourages purchase of employer-sponsored coverage rather than non-group coverage
Larger Subsidy for those with More Costly Plans
• Tax subsidy encourages purchase of more costly plans at the margin
• Tax subsidy also provides form of risk adjustment – Benefits are greatest for those with higher
health care costs• Older workers• Sicker workers• Larger families
Relative Magnitude
0
1000
2000
3000
4000
5000
6000
2007 KFF
HDHP
PPO
0
1000
2000
3000
4000
5000
6000
SF 2006 survey
25 yr M
55 yr M
Encourages Purchase of Group Coverage
• Among the privately insured under 65 – over 90% hold coverage through a family
member’s employment
• More common than retirement, life, disability benefits
65% 68% 68% 66% 65% 63%59% 60% 59% 62%
86%90% 91%
86% 84% 87% 87% 87%83%
90%99% 99% 99% 98% 98% 99% 98% 98% 99% 99%
56% 57% 58% 58%55% 52%
47% 48% 45%49%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
All Small Firms (3-199 Workers)10-24 WorkersAll Large Firms (200 or More Workers)3-9 Workers
Percentage of All Firms Offering Health Benefits, 1999-2008*
*Tests found no statistical differences from estimate for the previous year shown (p<.05).
Note: Estimates presented in this exhibit are based on the sample of both firms that completed the entire survey and those that answered just one question about whether they offer health benefits.
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2008.
ESI Coverage of Full Time Workers (Own and Dependent)
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Own ESI Own + Other
Tabulations of the CPS
Encourages Purchase of Group Coverage
• Would a coverage shift to non-group market be desirable?– Portability– Economies of scale– Selection– Long-term coverage (pooling today and
tomorrow)
Would it Occur?
• Depends on rules– premiums distributed per person?
• young, healthy, higher wage workers would have incentive to shift out of coverage
• Experience in group settings suggests could undermine pooling
Non-Group Market is Inherently Flawed
• Expenditures are highly skewed
• Private information (e.g., self-assessed health status) has strong predictive power
• Ample motive and opportunity to choose to participate in the market, to retain coverage, and to select a type of coverage based on private information– Insurance companies must respond
Can Better Tax Treatment Fix this Market?
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
% Non-Group Share of Private
HSATax Deductibility for Self-Employed rises from 25% to 100%
Effects of the tax treatment on coverage
• Withdrawal of favorable tax treatment in Quebec in 1993 (Stabile 2002; Finkelstein 2002)
– Employer coverage ↓ 20%– 10-15% of decline shifted
• Model based US estimate– 4-10% decline in spending– Half through a decline in insurance
coverage
Implementation Issues
• About 55% of insured workers are in self-insured firms– Premiums?– Allocation to individuals?
• How?
Conclusions
• Accounting simplicity
• History
• Costs – but also benefits
• Institutional alternative needed
