The Price Sensitivity of Demand for Nongroup Health Insurance
Congressional Budget Office
August 2005
This paper examines the sensitivity of decisions to purchase insurance in the individual, or “nongroup,” insurance market to the price of that insurance-a central aspect of tax credits and other price-based incentives to stimulate the purchase of private health insurance. The paper focuses on those without access to group insurance through an employer-in other words, those for whom nongroup insurance may be the only coverage option. Surveys by the Census Bureau and others help identify such people and allow an examination of their economic and demographic characteristics. However, those surveys do not contain information on the potential premium (or price) of insurance for those who do not purchase it.
This paper uses two alternative methods to estimate that premium for single workers partly on the basis of information about their health status. It then uses exogenous differences in insurance premiums attributable to (1) the tax deductibility of premiums for self-employed individuals and (2) the effect of state-level premium compression and community rating regulations to estimate the responsiveness of otherwise similar people to different levels of price. Using a reduced-form ordinary least squares (OLS) regression model, this analysis estimates a price elasticity of demand for health insurance of -0.57. For example, a 10 percent reduction in insurance premiums is estimated to result in a 5.7 percent increase in health insurance coverage in the nongroup market in our sample of single workers, 16 percent of whom had nongroup coverage at the time of the survey in 2002. Analyses of poor and less-healthy subgroups find largely insignificant results, though the less-healthy appear to be less responsive to premium changes than the more-healthy.
http://www.cbo.gov/ftpdocs/66xx/doc6620/08-24-HealthInsurance.pdf
Comment: Sorry to distribute a message that’s nearly lost in technical jargon, but this one is important.
Most current administration efforts to adopt policies that would reduce the numbers of uninsured are targeted toward the individual insurance market. In order to make premiums affordable, tax credits have been proposed. This study confirms, once again, that reducing premium costs for individuals, through the tax system, will have very little impact in reducing the numbers of uninsured.
The importance of this study is that in our debates we can now say, “The Congressional Budget Office says that tax credits won’t work! Now let’s talk instead about reform that really will work!”