1. Tax Policy Options Sherry Glied, Ph.D. Mailman School of Public Health Columbia University sag1@columbia.edu

2. Cautionary Note The only broad-based private health insurance systems that have ever existed anywhere have been based on employer- sponsored coverage and have provided favorable tax treatment of this coverage.

3. Concerns about the Tax Subsidy Larger direct subsidy for those in higher tax brackets Larger subsidy for those with more costly plans Differentially encourages purchase of employer-sponsored coverage rather than non-group coverage

4. Larger Subsidy for those with More Costly Plans Tax subsidy encourages purchase of more costly plans at the margin Tax subsidy also provides form of risk adjustment –Benefits are greatest for those with higher health care costs Older workers Sicker workers Larger families

5. Relative Magnitude

6. Encourages Purchase of Group Coverage Among the privately insured under 65 –over 90% hold coverage through a family member’s employment More common than retirement, life, disability benefits

7. Percentage of All Firms Offering Health Benefits, 1999-2008* *Tests found no statistical differences from estimate for the previous year shown (p<.05). Note: Estimates presented in this exhibit are based on the sample of both firms that completed the entire survey and those that answered just one question about whether they offer health benefits. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2008.

8. Tabulations of the CPS

9. Encourages Purchase of Group Coverage Would a coverage shift to non-group market be desirable? –Portability –Economies of scale –Selection –Long-term coverage (pooling today and tomorrow)

10. Would it Occur? Depends on rules –premiums distributed per person? young, healthy, higher wage workers would have incentive to shift out of coverage Experience in group settings suggests could undermine pooling

11. Non-Group Market is Inherently Flawed Expenditures are highly skewed Private information (e.g., self-assessed health status) has strong predictive power Ample motive and opportunity to choose to participate in the market, to retain coverage, and to select a type of coverage based on private information –Insurance companies must respond

12. Can Better Tax Treatment Fix this Market? HSA Tax Deductibility for Self-Employed rises from 25% to 100%

13. Effects of the tax treatment on coverage Withdrawal of favorable tax treatment in Quebec in 1993 (Stabile 2002; Finkelstein 2002) –Employer coverage ↓ 20% –10-15% of decline shifted Model based US estimate –4-10% decline in spending –Half through a decline in insurance coverage

14. Implementation Issues About 55% of insured workers are in self- insured firms –Premiums? –Allocation to individuals? How?

15. Conclusions Accounting simplicity History Costs – but also benefits Institutional alternative needed