The importance of Group Coverage: How Tax Policy Shaped U.S. Health Insurance

摘要

First codified in 1954, the tax subsidy of employer contributions to employee health insurance plans is a major feature of the U.S. health insurance market. Using previously unexamined data from surveys collected just before and after the tax subsidy was enacted, this paper provides a unique examination of the effect of the tax subsidy on the demand for health insurance market. While the markets for health care and health insurance have changed significantly in the past 50 years, results in this paper may provide policy makers with an upper bound in determining how eliminating the tax subsidy will affect the demand for health insurance. The paper suggests that the tax subsidy led to a shift from individual to group insurance and increased the amount of health insurance coverage purchased by households, especially households with high marginal tax rates. After the implementation of the tax subsidy in 1954, employer contributions to group insurance were exempt from employee taxable income, so that the after-tax price of group insurance fell. As a result, the demand for group insurance increased. Households with group policies bought even greater amounts of coverage after the tax subsidy was enacted, and households with higher marginal tax rates were more likely to have group insurance than they did before 1954, and purchased greater amounts of coverage. Overall, results indicate that the tax subsidy increased the amount of coverage purchased by 9.5 percent, suggesting an elasticity of demand for health insurance coverage of -0.54. While this estimate is consistent with other elasticities calculated in the literature, it should be emphasized that given that the health care system has changed dramatically since 1954, it may only represent an upper bound as to what may happen if the tax subsidy were eliminated. Despite these shortcomings, the paper nonetheless offers guidance to policy makers, and perhaps makes an important point: that the tax subsidy did more than simply increase the dollar value of coverage purchased by households. It also engendered a shift from individual coverage to group policies, allowing more households to receive group insurance. Access to group insurance is a strong predictor of insurance coverage-then and now. Policies that examine how changes in the tax subsidy might affect levels of coverage should also study how access to group insurance may be affected by such changes.