Healthcare Programs Sensitive to Tax Policy

April 17, 2001 ( - A recent study by the National Bureau of Economic Research found that tax reform measures would have a significant impact on employer-provided insurance since firms are fairly responsive to changes in the health insurance tax subsidy.

Because health insurance provided to employees is taxed at neither the individual level, nor at the payroll level, both the employer and the employee benefit.

Although these subsidies cost the government more than $100 billion in lost revenues and could be leading to over-insurance and healthcare cost inflation, reductions could be dangerous. Specifically, the study suggests that eliminating or reducing the tax subsidy could result in large reductions in insurance coverage.

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The study gauges the impact of the subsidy on firms’ insurance decisions by comparing firm insurance-offering rates and spending levels to the tax subsidies, to insurance for that firm’s workers, utilizing data from the Employee Compensation Index collected by the Bureau of Labor Statistics.

Using data from 1983 to 1995, the tax subsidy to insurance ratio for the median worker in each firm in each year was calculated.

The study found that:

  • each 10% rise in the tax subsidy to insurance for the firm’s median worker led to a rise of about 3% in the rate of insurance offering
  • small firms are particularly responsive, for those with fewer than 100 employees, each 10% rise in the subsidy leads to an increase of 6% in the offering rate
  • each 10% rise in the subsidy raises health insurance spending levels of these firms by almost 7%

Firms? insurance decisions are influenced by:

  • the tax price of the worker with the median wages in the firm,
  • the tax price of the highest paid workers.

The implication is that tax reforms have a huge effect on employer provided insurance. For instance, a radical reform measure that eliminate 60% of the subsidy would lead to a drop of 10 to 19% of firms offering insurance and a fall in spending of between 20% and 28%. The average total spending per individual on insurance would decline by 30% to 42%, or by $760 to $1,080.

This translates to 16 to 29 million people losing their employer-provided coverage, or 36% to two-thirds of the size of the current number of the nation?s uninsured.

If income tax rates were cut by 10%, consistent with President Bush?s tax reform proposal, the price of insurance tax would rise by 3.4%. At this level, firms would reduce their offerings of insurance by 1.1 % to 1.9% and spend 3.3% to 4.7% less.

– Camilla Klein                              

Read the complete study .