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VI. APPLICATION OF ELASTICITY ESTIMATES

Many researchers have applied elasticity estimates to draw conclusions about public policy

with respect to either insurance coverage or health care costs. Reflecting long-standing concerns

about health insurance coverage, most such applications have focused on the price elasticity of

demand for health insurance.

This chapter highlights some of these applications and summarizes the general policy

implications that researchers have drawn in four areas: tax subsidies for employer-sponsored

coverage, tax subsidies for individual coverage, cost-sharing in Medicaid/SCHIP, and the general

implications for health services use. While elasticity estimates also have been widely used to

simulate or predict the outcomes of specific policy proposals, these applications are not

discussed here, as their results are difficult to compare: even a small change in the elasticity

parameters can produce substantial differences in simulated effects depending on the many

assumptions and logic of the model.

A. TAX SUBSIDIES FOR EMPLOYER-SPONSORED COVERAGE

Federal and state tax subsidies are widely regarded as a critical to the development and

maintenance of employer-sponsored health insurance. Conversely, the elimination of the tax

exemption for employer-sponsored health insurance would likely be the largest single change

that might increase price competition in the health insurance industry (Morrisey 2005). Many

studies of tax-price elasticity have attempted to estimate the impact of tax subsidies and simulate

the effects of eliminating them.

The greatest impact of tax subsidies for health insurance may be on employers’ decisions to

offer coverage and set eligibility rules (Gruber 2001). Gruber and Lettau (2004) simulated a

major tax reform that would remove the tax subsidy (equivalent to a 58 percent increase in cost)

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