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The Effect of Tax-Exempt Out-of-Pocket Premiums on Health Plan Choice

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

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.

Suggested Citation

  • Dowd, Bryan & Feldman, Roger & Maciejewski, Matthew & Pauly, Mark V., 2001. "The Effect of Tax-Exempt Out-of-Pocket Premiums on Health Plan Choice," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(4), pages 741-756, December.
    • Handle: RePEc:ntj:journl:v:54:y:2001:i:4:p:741-56
    DOI: 10.17310/ntj.2001.4.03
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    References listed on IDEAS

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    1. Pauly, Mark V, 1986. "Taxation, Health Insurance, and Market Failure in the Medical Economy," Journal of Economic Literature, American Economic Association, vol. 24(2), pages 629-675, June.
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    1. Jack, William & Levinson, Arik & Rahardja, Sjamsu, 2006. "Employee cost-sharing and the welfare effects of flexible spending accounts," Journal of Public Economics, Elsevier, vol. 90(12), pages 2285-2301, December.
    2. Abraham, Jean M. & Feldman, Roger & Carlin, Caroline & Christianson, Jon, 2006. "The effect of quality information on consumer health plan switching: Evidence from the Buyers Health Care Action Group," Journal of Health Economics, Elsevier, vol. 25(4), pages 762-781, July.
    3. Jonas Pendzialek & Dusan Simic & Stephanie Stock, 2016. "Differences in price elasticities of demand for health insurance: a systematic review," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(1), pages 5-21, January.

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