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LECTURE+6+-+ESI - Lecture 6 Employer Sponsored Insurance...

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Lecture 6: Employer Sponsored Insurance Health Economics 01:220:316 Prof. Derek DeLia, Ph.D.
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Employer sponsored insurance (ESI) Common around the world Natural advantages (Large firms) Risk pooling Reduced adverse selection Monopsony/advocacy Disadvantages Small firms/self-employed Job lock Wage distortions Tax issues
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Tax treatment of ESI
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Example: Tax treatment of ESI Total worker compensation C is composed of salary (S) and health insurance (H). 1. Using an indifference curve and budget line, draw the worker’s equilibrium amount of S and H. 2. What is the rate of trade between S and H? 3. How the answers to 1 and 2 change if all compensation is taxed at a rate 10%? What if the tax rate is 40%? 4. What if the tax rate is t where 0 < t < 1? 5. How would the answers change if salary were taxed at rate t but health insurance was tax exempt?
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Public costs of health insurance arrangements, 2004 $295 $288 $210 Medicare Medicaid Tax expenditure on ESI $Billions Sources: KFF; Sheils & Haught, 2004
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