Sebastian Fleitas, PUC-Chile & CEPR

"Selection, Subsidies, and Welfare in Health Insurance: Employer Sponsored Health Insurance Versus the ACA Marketplaces"

Abstract

The Affordable Care Act (ACA) changed incentives for purchasing private health insurance, potentially crowding out employer-sponsored insurance. We analyze the heterogeneous welfare gains across individuals in the small group market (SGM) from alternative formulations of the ACA health insurance exchanges (HIX).We find that, when holding the number of plans offered constant, most individuals are better off in the SGM. When we offer individuals more choice in the HIX, there are welfare gains from switching to the HIX. However, the advantage of the HIX can be partially reduced by employer contributions to premiums in the SGM, helping to understand why individuals choose to stay in the SGM. In general, tax incentives do not make large differences in consumers’ decisions between the HIX and the SGM. However, they have important distributional implications. The SGM, with its tax deductibility of premiums, is more beneficial for higher income individuals and it is advantageously selected  in relation to the HIX, since it is more attractive for lower risk individuals. Removing the tax deductibility in the small group market generates an average welfare loss for consumers which can be offset by the additional introduction of subsidies similar to those present in the HIX. A SGM without tax deductibility and with subsidies increases average consumer welfare relative to the current SGM and improves take-up, although it has a higher cost to the government.

Contact person: Anders Munk-Nielsen