Study Guide for Final Exam Fall 2011 - `Study Guide for...

`Study Guide for Final Exam – Fall 2011
1. How do tax laws in the US subsidize health insurance?
Employer-paid health insurance is not taxed as employee’s income – exempt
from federal, state, and payroll taxes (taxes that support Medicare and Social
Security, FICA). Also Employers’ premium contributions are not considered
when assessing payroll tax.
Some employees also can deduct their share of premiums from wages before
they are taxed, as in They do not pay income or payroll taxes on the portion
of health insurance premium that they pay. There are also Modest federal
tax assistance for families purchasing insurance directly from an insurer. For
example Families that itemize deductions can deduct portion of medical
expenses including premiums that exceed 7.5% of adjusted gross income
Basically employers can provide health insurance directly to workers, and
this form of compensation is not taxed as income. So if you make $1000, and
insurance is $50, $950 of it is taxed.
Tax policy lowers the price of a dollar of health insurance relative to a dollar
of wage remuneration, that is one dollar of wages buys more than a dollar of
health insurance
2. Show with a graph the likely consequences of an employer mandate on
employment and wages. Understand how the elasticity of supply and demand
affect the consequences of a mandate.
Reduced employment and reduced wages.
Shift in demand curve to the left for labor by $H for each FTE. Employer is
willing to pay $H less than before because of $H premium
Shift in supply curve to the right
People willing to supply more hours of work at same wages as before if job
quality increases. If people value health insurance coverge, they are willing to
give up wage income for insruance.
Employer mandate will affect wages and employement but effects depend on how
much the SL curve shift to the right and the elasticity of demand and supply of
labor.
Mandate will cause unemployment among low skilled workers.
CHECK 3 graphs
Dont care DL
Care - DL SL
Unemployment - lower FTE
Very elastic supply of labor
large effect on employment like minimum wage (200000 loss)

Very inelastic supply of labor
large cut in wage but little effect on unemployment
Very elastic demand for labor
large cut in employment and wages
Very inelastic demand for labor
small wage or employement cuits
3. What are the advantages and disadvantages of experience rating vs. community
rating?
The advantages of experience ratings are
1. Limits adverse selection
2. Is efficient
3. Young people (who tend to be less wealthy) pay lower premiums than old
people
4. Incentive to live healthy lifestyle.
The advantages of community ratings are
1. Doesn't punish the sick (equity concerns about experience rating)
2. Does not cause "cherry picking" by insurance companies
3. WIll lead to creation of system wide medical cost savings
Disadvantages of communtity ratings
1. Reduce insurance coverage if an adverse selection death spiral occurs
2. Young people will drop their insurance if premiums do not reflect their risks