May 5, 2013
R40425 – January 31, 2013
This paper introduces a model of optimal health insurance. This model provides theoretical guidance of the relationship between household preferences, cost-sharing, and premiums. It applies this model to understand how the income tax subsidy distorts optimal cost-sharing in health insurance. Typically, insurance protects individuals from financial risk. Health insurance plans, however, are frequently designed to provide coverage at non-catastrophic levels of financial loss. The presence of a health insurance subsidy in the United States tax code, which enables individuals to pay premiums in pre-tax dollars, encourages the purchase of more generous health insurance plans. Little is known about how the tax subsidy affects preferences for the structure of cost-sharing in private plans. This model illustrates how the tax subsidy can distort the optimal cost-sharing schedule. The model is tested empirically using claims data in the Medical Expenditure Panel Survey and a regression discontinuity strategy that uses discrete changes in the marginal tax rate at the Social Security taxable maximum for identification.
1. Defense Health Care: TRICARE Multiyear Surveys Indicate Problems with Access to Care for Nonenrolled Beneficiaries. GAO-13-364, April 2.
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Health insurance companies reported spending an average of less than 1 percent of the premiums they collected from policyholders in 2011 on activities directly supporting improvement of health care quality, according to a Commonwealth Fund study released today.
The new report, by Mark A. Hall and Michael J. McCue, looks at differences in medical loss ratios, consumer rebates, and quality improvement expenses, based on insurers’ corporate structure and ownership. The authors find that insurance companies spent a combined $2.3 billion on direct quality improvement activities―an average of $29 per subscriber.
The Affordable Care Act’s medical loss ratio rule requires insurers to spend at least 80 or 85 percent of premiums on medical claims and quality improvement activities―those likely to improve health outcomes, prevent hospital readmissions, improve patient safety, and increase wellness and health promotion―or else pay rebates to consumers.
Read more on commonwealthfund.org.