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)