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Brooks Wilson's Economics Blog: Things I Learned in California: Thomasson and Health Insurance

Monday, October 26, 2009

Things I Learned in California: Thomasson and Health Insurance

I spent a bunch of time this weekend traveling to and from California.  In flight, I read Melissa Thomasson's "The Importance of Group Coverage: How Tax Policy Shaped U.S. Health Insurance," American Economic Review, Vol. 93, No. 4, 2003.  I picked out two quotes from the article.  The first deals with the emergence of employer provided health care.

The development...employment-based insurance in the United States can be traced to several factors: a provision in the 1942 Stabilization Act that allowed employers to use fringe benefits to attract labor during World War II; the ability of insurance companies to counter adverse selection by selling to employee groups; and perhaps most importantly, a tax policy first introduced in 1943 and codified in 1954 that exempts employer contributions to employee health plans from taxable employee income.

Adverse selection is the idea that those that have the greatest health care needs will be the first to try to buy insurance, imposing their higher than average costs on others that buy insurance.  As costs rise, the health may abandon the market.  The cost can be lowered in several ways including screening applicants for preexisting conditions.  Some people oppose screening on normative grounds.

Thomasson attempts to measure the impact of a 1954 revision of the Internal Revenue Code that codified the tax exempt status of wages paid to purchase health care through company plans. 

Overall, the results suggest that by increasing the incentive to purchase insurance through the workplace,  the tax subsidy both increased the amount of insurance purchased and increased the probability that households would buy coverage. 

If the Congress desires something closer to universal coverage and wishes to increase incentives of people to buy insurance through markets, it should extend the tax subsidy received by employees with employer provided health insurance to those without it.  This amounts to extension of the tax subsidy for all buyers.  Subsidies to buyers increase demand. 

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