Some Effects of Tax Caps on Insurance Pricing and Coverage Rates

This paper examines the effects of limitations on the excludability of employerprovided health insurance from taxable income on the pricing policies of insurance companies. Concentrating on the demand side, standard analysis (e.g., Congressional Budget Office, 1994) would suggest that individuals previously purchasing above the limitation would reduce their level of coverage, while those below would not be directly affected. The main result of this paper is that if insurance companies engage in price discrimination, then the tax cap can lead to increases in the coverage rates of previously low-demand individuals. It is also possible that some currently uninsured individuals could enter the insurance market as a result of the tax cap. Furthermore, it is argued that the market for employer-provided insurance is able to support discriminatory pricing, even if competition drives net profits of insurance companies to zero.