Working Paper - Comments Welcome Consumption Elasticities and Tax Policy in the Employer Provided Health Insurance Market

Most people in the United States purchase health insurance through their employer due to the tax subsidy on employer-provided health insurance premiums. A large literature has developed that looks at impact of reductions in this tax subsidy. Recent papers tend to focus on changes in offers, eligibility, and take-up as a result of changes in the tax subsidy. One might consider these as changes along the extensive margin. There has not been any recent work that examines changes in the amount of insurance employees consume as a result of changes in the tax subsidy. One might consider this as a change along the intensive (or consumption) margin. The purpose of this paper is to use new data and econometric techniques to examine changes along this consumption margin. A tax price elasticity of insurance consumption is estimated to be 2.18 using data from the 1987 National Medical Expenditure Survey (NMES). This consumption elasticity is larger than the offer, eligibility, and take-up elasticities found in the recent literature and may suggest that the biggest impact of a reduction in the tax subsidy is found along the consumption margin. JEL classification: D10; I18; H24