Unbiased Analysis of Today's Healthcare Issues

Tax Credits, the Distribution of Subsidized Health Insurance Premiums, and the Uninsured

Written By: Jason Shafrin - Apr• 17•06

The popular press has been decrying the existence of large numbers of Americans without medical insurance. From Indiana to Wisconsin to California, politicians are looking for a means–such as government provided health insurance–to give more residents medical insurance. Economists, however, generally speak out against the provision of private goods by the government.

An interesting solution was proposed by Pauly Herring and Song (2002) in which individuals would receive a $1000 refundable tax credit if they (or their employers) purchased health insurance. The study focuses on single individuals using the 1996-97 Community Tracking Survey (CTS). Using the eHealthInsurance.com website, they were able to calculate the premiums each individual in the CTS survey would pay if they were currently applying for insurance. The authors assumed participants would choose the lower priced options and thus calculated the premiums owed at the 10th and 25th quartiles for a variety of deductible amounts.


  • They found that using this credit, approximately 20% of all individuals who had previously purchased individual insurance would pay zero net premiums after applying the credit.
  • Assuming an Arrow-Pratt absolute risk aversion coefficient of 0.00095, Pauly, et al. are able to calculate a reservation price for each person, using an expected utility framework. They find that of all the currently uninsured individuals in the sample, 77%-85% would take up the insurance.
  • The 85% number, may be overly optimistic. The calculated reservation price is actually greater than the absolute premium for 23% of the sample, and thus the authors settle on 60%-65% as a more conservative estimate. The lower take-up rate may be due to the fact that most poor individuals are able to receive charity care at no cost, and thus have less of an incentive to purchase insurance at some non-zero cost.
  • According to Health Affairs, maintaining the tax-exempt status of employer-provided group insurance cost taxpayers $188.5 billion in foregone revenue in 2004. If we implemented the voucher system where single households received a $1000 credit and family households received a $2000 credit, the cost to taxpayers would be only $142.9 billion assuming all individuals received the credit (calculations made using US Census population projections p. 18). This does not even take into account the cost reductions from decreased Medicaid and/or Medicare usage.
  • One issue to worry about with this proposal is fraud. Will people falsely report that they have insurance in order to receive the credit? I would assume this wold occur, but the prevalence can not be predicted.

Pauly, Herring, and Song (2002) “Tax Credits, the Distribution of Subsidized Health Insurance Premiums and the UninsuredForum for Health Economics and Policy, Vol 5(5).

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