Tax Subsidies for Out-of-Pocket Healthcare Costs Jessica Vistnes Agency for Healthcare Research and Quality William Jack Georgetown University Arik Levinson Georgetown University The views expressed in this paper are those of the authors and no official endorsement by the Bureau of the Census, the Department of Health and Human Services, or the Agency for Healthcare Research and Quality is intended or should be inferred.

“Employers are shifting a growing share of the burden onto people who make the heaviest use of medical services.” “... Fast-rising co-payments and deductibles” -- October 22, 2003 “In addition to rising premium costs and plan deductibles, 95% of covered workers are now responsible for copayments and shared costs for hospital stays, outpatient surgeries and out-of-plan services.” -- September 12, “insurance companies are now shifting more costs to consumers, in the form of much higher deductibles, co-payments or premiums” -- October 23, 2005

Explanations for the declining generosity of employer-provided Health Insurance Falling marginal tax ratesGruber and McKnight (2003). Increasing Medicaid eligibility“ Female labor force participation Dranove et al. (2000). Our hypothesis: increasing tax subsidies for out-of-pocket expenses Flexible Spending Accounts (FSAs) Medical Savings Accounts and Health Reimbursement Accounts Health Savings Accounts (HSAs)

Research Question: Does the availability of tax subsidies increase the market provided level of cost-sharing? Motivations: Tax policy explain increased employee burden? HSAs require increased cost sharing. Jack et al. (2006) result using 1993 data still true today?

1993 Employer Health Insurance Survey (EHIS) Coinsurance rates are 7 percentage points higher with FSAs. Net of subsidy, average out-of pocket costs approximately unchanged. Evidence that tax subsidies and cost sharing are related. Jack et al. (2006)

Evidence that tax subsidies and cost sharing are related. Jack et al. (2006) Table 3. Estimation Results of the Coinsurance Equation OLSIV Dependent variable: κ FSA dummy coefficient1.365*7.312* (0.342)(1.927)

Evidence that tax subsidies and cost sharing are related Hamilton and Marten (2008) Data for employees of a large public university (2003). FSA participation, 13 % Average contribution = $1257. FSA participants choose insurance plans with higher out-of-pocket expenses. “... these employees are creating their own ‘consumer-driven’ plan.”.

Some intuitive theory Optimal health insurance exposes individuals to some risk (cost sharing) in order to reduce moral hazard. A subsidy to out-of-pocket expenses exposes the individual to less risk than is optimal. In response, insurance contracts will be re-calibrated to restore the optimal balance between risk and moral hazard. This should show up in higher nominal cost-sharing rates.

Medical Expenditure Panel Survey (MEPS) – Insurance component Annual, nationally representative survey of establishments in the U.S. Number and types of plans. Plan characteristics. Premiums, coinsurance, copays, deductibles. Whether establishment has an FSA. Extends Jack et al. more current more representative higher response rate more observations.

Recent trends in flexible spending accounts. All Firms Small Firms (10-24 employees) Large Firms ( employees) % with FSAs YearEstabsEmps a EstabsEmps a EstabsEmps a Source: Medical Expenditure Panel Survey – Insurance Component, private sector establishments. a Figures are weighted by the number of employees eligible for HI. Sample includes only establishments that offer health insurance.

Source: Medical Expenditure Panel Survey – Insurance Component, private sector establishments.

Empirical strategy Objective: estimate effect of FSAs on cost-sharing rates Regress cost sharing on plan characteristics, including FSA dummy. Main econometric problem: "selection" a) "good" employers offer FSAs and provide generous insurance (low cost-sharing). b)exogenous increase in cost-sharing may cause firms to offer FSAs

Empirical strategy Solution: follow Jack et al. 2-stage IV as in Heckman and Robb (1985) and Wooldridge (2002). 1.Probit to predict FSAs. Instruments: firm age, % eligible, other locations. 2.Use predicted probabilities as instruments in cost-sharing regression.

Table 2: First-stage probit of whether or not an employer offers an FSA Coinsurance rates sample (1) Copayment sample (2) Deductible sample (3) Instruments Firm age (0.61) -0.89* (0.41) (0.37) Firm age (0.51) (0.35) (0.32) Firm age (0.50) (0.34) (0.31) Firm age > (0.50) (0.34) (0.31) Multiplant firm0.57* (0.12) 0.29* (0.09) 0.32* (0.07) Percent employees eligible0.21 (0.21) 0.38* (0.14) 0.32* (0.12) Exogenous regressors-- see paper -- Number of observations6,12918,29724,099 Joint test of instruments F(7)4.24*4.43*5.37*

Coinsurance rates sample (1) Copayment sample (2) Deductible sample (3) Exogenous regressors Percent workers earning < $10/hr-1.63* (0.30) -1.67* (0.16) -1.70* (0.16) Percent workers earning $10 to $23/hr -0.91* (0.24) -0.91* (0.12) -0.91* (0.12) Percent workers unionized-0.14 (0.17) (0.12) (0.11) Percent workers female0.40* (0.20) 0.31* (0.13) 0.14 (0.11) Percent workers > 50 yrs old0.41 (0.28) 0.25 (0.17) 0.16 (0.15) Top state marginal income tax rate (0.0140) (0.0097) (0.0088) Other covariates: Firm and establishment type dummies, Ownership type dummies, Census division dummies (8), Industry dummies (11), missing demographic data dummies Table 2 (continued)

Table 3: Cost-Sharing Equations Coinsurance rateCopaymentDeductible OLS (1) OLS (3) OLS (5) FSA0.49 (0.56) 0.48 (0.31) 11.6 (18.8) Percent workers earning < $10/hr 1.87 (1.46) 2.89* (0.75) 112.9* (45.3) Percent workers earning $10 to $23/hr (1.24) 1.35* (0.57) 92.0* (33.6) Percent workers unionized-1.86* (0.93) -3.51* (0.49) (32.8) Percent workers female0.46 (1.15) (0.56) 11.8 (32.4) Percent workers > 50 yrs old 0.90 (1.51) (0.78) 105.9* (43.9) Top state marginal income tax rate 0.16 (0.10) 0.03 (0.05) -1.2 (2.3) Firm and establishment size dummies, ownership, region, and industry dummies. Number of obs.6,12918,29724,099 R2R

Table 3: Cost-Sharing Equations Coinsurance rateCopaymentDeductible OLS (1) IV (2) OLS (3) IV (4) OLS (5) IV (6) FSA0.49 (0.56) 9.18* (2.47) 0.48 (0.31) (1.83) 11.6 (18.8) (97.2) Percent workers earning < $10/hr 1.87 (1.46) 6.10* (1.98) 2.89* (0.75) 1.74 (1.03) 112.9* (45.3) 21.6 (56.2) Percent workers earning $10 to $23/hr (1.24) 1.91 (1.46) 1.35* (0.57) 0.81 (0.71) 92.0* (33.6) 49.5 (38.7) Percent workers unionized-1.86* (0.93) (0.98) -3.51* (0.49) -3.59* (0.50) (32.8) (33.5) Percent workers female0.46 (1.15) 1.34 (1.20) (0.56) (0.54) 11.8 (32.4) 22.8 (33.5) Percent workers > 50 yrs old 0.90 (1.51) 1.39 (1.51) (0.78) (0.81) 105.9* (43.9) 116.7* (43.7) Top state marginal income tax rate 0.16 (0.10) 0.13 (0.10) 0.03 (0.05) 0.03 (0.05) -1.2 (2.3) -0.7 (2.3) Firm and establishment size dummies, ownership, region, and industry dummies. Number of obs.6,129 18,297 24,099 R2R

Table 4: FSA Coefficient in models with alternative specifications FSA Coefficient Coinsurance rate (1) Copayment (2) Deductible (3) Baseline, from Table 39.18* (2.47) (1.83) (97.2) Drop age of firm instrument 6.97* (2.55) (1.58) (99.9) -- significant in 2 nd stage No Drop multiplant firm instrument 5.93* (2.72) (1.93) (103.4) -- significant in 2 nd stage yesNo Drop percent eligible instrument 9.51* (2.47) (1.91) (104.3) -- significant in 2 nd stage NoYesNo Enrollment weights rather than eligibility weights Original specification 6.44* (2.43) (1.92) (88.4)

Reasons why results may differ from More firms have FSAs → Non-FSA firms now a poor treatment. -- instruments less important determinants of FSAs 2.Other options for tax subsidy make FSAs less important.

Conclusions Mixed In aggregate, cost-sharing for firms with FSAs falling relative to firms without FSAs. Controlling for other characteristics and selection... - Some evidence that coinsurance rates are higher with FSAs → supports Jack et al. findings from No similar evidence for copayments or deductibles Little support for hypothesis that tax subsidies have large effects on out-of-pocket costs.