The Effect of Tax-Exempt Out-of-Pocket Premiums on Health Plan Choice

Abstract

Market-based health care reform proposals typically rely on 1) consumer choice among competing health plans, 2) premiums paid out-of-pocket for higher priced plans, and 3) a significant out- of-pocket premium-price elasticity of health plan choice. Section 125 of the Internal Revenue Code exempts employee out-of-pocket premiums from personal income taxes and FICA taxes. The predicted effect is attenuation of the out-of-pocket premium-price elasticity of health plan choice. Using 1994 data from a national sample of large public employers, we find that employees are sensitive to out-of-pocket premiums, but tax-exempt out-of-pocket premiums reduce substantially the price elasticity of health plan choice. Dowd, Bryan, Feldman, Roger, Maciejewski, Matthew, and Pauly, Mark V. (2001), The Effect of Tax-Exempt Out-of-Pocket Premiums on Health Plan Choice , National Tax Journal, 54:4, pp. 741-56 DOI: dx.doi.org/10.17310/ntj.2001.4.03