The effect of tax-exempt out-of-pocket premiums on health plan choice

Bryan Dowd, Roger Feldman, Matthew Maciejewski, Mark V. Pauly

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

Market-based health care reform proposals typically rely on 1) consumer choice among competing health plans, 2) premiums paid out-of-pocket for higher priced plans, and 3) a significant out-of-pocket premium-price elasticity of health plan choice. Section 125 of the Internal Revenue Code exempts employee out-of-pocket premiums from personal income taxes and FICA taxes. The predicted effect is attenuation of the out-of-pocket premium-price elasticity of health plan choice. Using 1994 data from a national sample of large public employers, we find that employees are sensitive to out-of-pocket premiums, but tax-exempt out-of-pocket premiums reduce substantially the price elasticity of health plan choice.

Original languageEnglish (US)
Pages (from-to)741-753
Number of pages13
JournalNational Tax Journal
Volume54
Issue number4
DOIs
StatePublished - Dec 2001

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