Subsidies and the Demand for
Individual Health Insurance in
M. Susan Marquis, Melinda Beeuwkes Buntin, Jose J. Escarce,
Kanika Kapur, and Jill M. Yegian
Objective. To estimate the effect of changes in premiums for individual insurance on decisions to purchase individual insurance and how this price response varies among subgroups of the population.
Data Source. Survey responses from the Current Population Survey (www.bls. census.gov/cps/cpsmain.htm), the Survey of Income and Program Participation (www.sipp.census.gov/sipp), the National Health Interview Survey (www.cdc.gov/ nchs/nhis.htm), and data about premiums and plans offered in the individual insurance market in California, 1996–2001.
Study Design. A logit model was used to estimate the decisions to purchase individual insurance by families without access to group insurance. This was modeled as a function of premiums, controlling for family characteristics and other characteristics of the market. A multinomial model was used to estimate the choice between group coverage, individual coverage, and remaining uninsured for workers offered group coverage as a function of premiums for individual insurance and out-of-pocket costs of group coverage. Principal Findings. The elasticity of demand for individual insurance by those without access to group insurance is about À .2 to À .4, as has been found in earlier studies. However, there are substantial differences in price responses among subgroups with low-income, young, and self-employed families showing the greatest response. Among workers offered group insurance, a decrease in individual premiums has very small effects on the choice to purchase individual coverage versus group coverage. Conclusions. Subsidy programs may make insurance more affordable for some families, but even sizeable subsidies are unlikely to solve the problem of the uninsured. We do not ﬁnd evidence that subsidies to individual insurance will produce an unraveling of the employer-based health insurance system.
Key Words. Demand for health insurance, safety net, tax credits
More than 40 million Americans are uninsured. Policymakers and analysts widely agree that low incomes and high premiums are a primary cause. Thus, most proposals for reform include subsidies or public program expansions to reduce these barriers (e.g., Pauly 2001; Davis and Schoen 2003). The Bush administration proposed a new tax credit for those who do not have access 1547
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to employer-sponsored insurance, which received broad political support (Cunningham 2002b). Because the tax system subsidizes the purchase of employer group coverage, some analysts argue that providing tax subsidies to those who are not offered group plans is an equitable approach to reducing the problem of the uninsured (Kendall 2000; Butler 1999; Pauly and Hoff 2002). However, others believe that tax credits may lead to an unraveling of the employment-based system for health insurance that could lead to a reduction in overall coverage (Aaron 1999). This would occur if employees found they were better off purchasing in the individual market and dropped their employer plan. Employers’ decisions to offer insurance may also be affected if healthy members leaving the group leads to an increase in premiums or an inability to meet group size requirements.
Central to designing a tax credit is information about how a change in the price of individual insurance will affect decisions to purchase it. We need information about the price response and how it varies for different subgroups to determine the necessary size of the tax credit. We also need this information to determine how many workers covered by group plans might switch to the individual market to assess the effects of a tax credit on the employment-based system. Despite the considerable recent interest in tax subsidies and credits, there is relatively little empirical...
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