Tax Subsidies for Out-of-Pocket Healthcare Costs

1. Tax Subsidies for Out-of-Pocket Healthcare Costs 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.

2. “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 “insurance companies are now shifting more costs to consumers, in the form of much higher deductibles, co-payments or premiums” -- October 23, 2005 “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, 2007.

3. Explanations for the declining generosity of employer-provided Health Insurance • Falling marginal tax rates Gruber 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)

4. 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?

5. Evidence that tax subsidies and cost sharing are related. • Jack et al. (2006) • 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.

6. 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.” • .

7. 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.

8. 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.

9. Source: 2001-2005 Medical Expenditure Panel Survey – Insurance Component, private sector establishments.

10. Source: 2001-2005 Medical Expenditure Panel Survey – Insurance Component, private sector establishments.

11. Source: 2001-2005 Medical Expenditure Panel Survey – Insurance Component, private sector establishments.

12. Source: 2001-2005 Medical Expenditure Panel Survey – Insurance Component, private sector establishments.

13. Source: 2001-2005 Medical Expenditure Panel Survey – Insurance Component, private sector establishments.

14. 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

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

16. Table 2: First-stage probit of whether or not an employer offers an FSA

17. Table 2 (continued)

18. Table 3: Cost-Sharing Equations

19. Table 3: Cost-Sharing Equations

20. Table 4: FSA Coefficient in models with alternative specifications

21. Reasons why results may differ from 1993 • More firms have FSAs →Non-FSA firms now a poor treatment. • -- instruments less important determinants of FSAs • Other options for tax subsidy make FSAs less important.

22. 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 1993 • No similar evidence for copayments or deductibles • Little support for hypothesis that tax subsidies have large effects on out-of-pocket costs.