Tax Subsidies for Out-of-Pocket Healthcare Costs

Jessica VistnesAgency for Healthcare Research and Quality

William JackGeorgetown University

Arik LevinsonGeorgetown University

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.

“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

“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.

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

-- October 23, 2005

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)

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?

• 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.

Evidence that tax subsidies and cost sharing are related.

Jack et al. (2006)

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.”

.

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.

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.

Percent of establishments with FSAs

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005

< 10 employees 10-24 employees 25-99 employees

100-999 employees 1000+ employees

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

Percent of employees with FSAs

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005

< 10 employees 10-24 employees 25-99 employees

100-999 employees 1000+ employees

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

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

Average Coinsurance RatesWith and Without FSAs

17

17

18

18

19

19

20

20

2001 2002 2003 2004 2005

Year

Ave

rag

e C

oin

sura

nce

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Pro

po

rtio

n

wit

h F

SA

Percent of employees with FSAs

Average coinsurance without FSAs

Average coinsurance with FSA

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

Average DeductiblesWith and Without FSAs

0

100

200

300

400

500

600

700

800

900

2001 2002 2003 2004 2005

Year

Ave

rag

e d

edu

ctib

le

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Pro

po

rtio

n

wit

h F

SA

Percent of employees with FSAs

Average deductible without FSAs

Average deductible with FSA

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

Average CopaymentWith and Without FSAs

0

5

10

15

20

25

2001 2002 2003 2004 2005

Year

Ave

rag

e C

op

aym

ent

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Pro

po

rtio

n

wit

h F

SA

Percent of employees with FSAs

Average copayment without FSAs

Average copayment with FSA

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

i i i iFX

Empirical strategy

Solution: follow Jack et al.

2-stage IV as in Heckman and Robb (1985) and Wooldridge (2002).

1. Probit to predict FSAs.

Instruments: firm age, % eligible, other locations.

2. Use predicted probabilities as instruments in cost-sharing regression.

ˆi i i iX F

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

Coinsurance rates sample

(1)

Copayment sample

(2)

Deductible sample

(3)

 

 

Instruments  

Firm age 3-4 0.29(0.61)

-0.89* (0.41)

-0.69(0.37)

 

Firm age 5-9 0.38(0.51)

-0.32(0.35)

-0.31(0.32)

 

Firm age 10-20 0.15(0.50)

-0.46(0.34)

-0.47(0.31)

 

Firm age >20 0.42(0.50)

-0.36(0.34)

-0.36(0.31)

 

Multiplant firm 0.57*(0.12)

0.29*(0.09)

0.32*(0.07)

 

Percent employees eligible 0.21(0.21)

0.38*(0.14)

0.32*(0.12)

 

Exogenous regressors -- see paper --  

Number of observations 6,129 18,297 24,099  

Joint test of instruments F(7) 4.24* 4.43* 5.37*  

Coinsurance rates sample

(1)

Copayment sample

(2)

Deductible sample

(3)

 

 

Exogenous regressors  

Percent workers earning < $10/hr -1.63*(0.30)

-1.67* (0.16)

-1.70*(0.16)

 

Percent workers earning $10 to $23/hr

-0.91*(0.24)

-0.91*(0.12)

-0.91*(0.12)

 

Percent workers unionized -0.14(0.17)

-0.18(0.12)

-0.12(0.11)

 

Percent workers female 0.40*(0.20)

0.31*(0.13)

0.14(0.11)

 

Percent workers > 50 yrs old 0.41(0.28)

0.25(0.17)

0.16(0.15)

 

Top state marginal income tax rate

0.0129(0.0140)

0.0054(0.0097)

0.0089(0.0088)

 

Other covariates: Firm and establishment type dummies, Ownership type dummies, Census division dummies (8), Industry dummies (11), missing demographic data dummies

 

Table 2 (continued)

Table 3: Cost-Sharing Equations

Coinsurance rate Copayment Deductible

OLS(1)

OLS(3)

OLS(5)

FSA 0.49(0.56)

0.48(0.31)

11.6(18.8)

Percent workers earning < $10/hr

1.87(1.46)

2.89*(0.75)

112.9*(45.3)

Percent workers earning $10 to $23/hr

-0.17(1.24)

1.35*(0.57)

92.0*(33.6)

Percent workers unionized -1.86*(0.93)

-3.51*(0.49)

-23.0(32.8)

Percent workers female 0.46(1.15)

-0.63(0.56)

11.8(32.4)

Percent workers > 50 yrs old

0.90(1.51)

-1.27(0.78)

105.9*(43.9)

Top state marginal income tax rate

0.16(0.10)

0.03(0.05)

-1.2(2.3)

Firm and establishment size dummies, ownership, region, and industry dummies.

Number of obs. 6,129 18,297 24,099

R2 0.09 .07 .08

Table 3: Cost-Sharing Equations

Coinsurance rate Copayment Deductible

OLS(1)

IV(2)

OLS(3)

IV(4)

OLS(5)

IV(6)

FSA 0.49(0.56)

9.18*(2.47)

0.48(0.31)

-2.07(1.83)

11.6(18.8)

-179.5(97.2)

Percent workers earning < $10/hr

1.87(1.46)

6.10*(1.98)

2.89*(0.75)

1.74(1.03)

112.9*(45.3)

21.6(56.2)

Percent workers earning $10 to $23/hr

-0.17(1.24)

1.91(1.46)

1.35*(0.57)

0.81(0.71)

92.0*(33.6)

49.5(38.7)

Percent workers unionized -1.86*(0.93)

-1.55(0.98)

-3.51*(0.49)

-3.59*(0.50)

-23.0(32.8)

-27.7(33.5)

Percent workers female 0.46(1.15)

1.34(1.20)

-0.63(0.56)

-0.38(0.54)

11.8(32.4)

22.8(33.5)

Percent workers > 50 yrs old

0.90(1.51)

1.39(1.51)

-1.27(0.78)

-1.08(0.81)

105.9*(43.9)

116.7*(43.7)

Top state marginal income tax rate

0.16(0.10)

0.13(0.10)

0.03(0.05)

0.03(0.05)

-1.2(2.3)

-0.7(2.3)

Firm and establishment size dummies, ownership, region, and industry dummies.

Number of obs. 6,129 6,129 18,297 18,297 24,099 24,099

R2 0.09 .07 .08

Table 4: FSA Coefficient in models with alternative specifications

FSA Coefficient Coinsurance rate(1)

Copayment(2)

Deductible(3)

Baseline, from Table 3 9.18*(2.47)

-2.07(1.83)

-179.5(97.2)

Drop age of firm instrument

6.97*(2.55)

-2.83(1.58)

-159.1(99.9)

-- significant in 2nd stage No No No

Drop multiplant firm instrument

5.93*(2.72)

-2.96(1.93)

-153.1(103.4)

-- significant in 2nd stage yes No No

Drop percent eligible instrument

9.51*(2.47)

-1.27(1.91)

-180.0(104.3)

-- significant in 2nd stage No Yes No

Enrollment weights rather than eligibility weights

Original specification 6.44*(2.43)

-1.64(1.92)

-114.3(88.4)

Reasons why results may differ from 1993

1. More firms have FSAs → Non-FSA firms now a poor treatment.

-- instruments less important determinants of FSAs

2. Other options for tax subsidy make FSAs less important.

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.