LEEMORE S. DAFNY, Northwestern University - Department of Management & Strategy, National Bureau of Economic Research (NBER)
Email: l-dafny@kellogg.northwestern.edu

Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently face higher premium growth, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity where they have sufficient bargaining power. Given the rapid industry consolidation during the study period, these findings suggest healthcare insurers possess and exercise market power in an increasing number of geographic markets.

JEROME ADDA, University College London - Department of Economics, Institute for Fiscal Studies (IFS)
Email: j.adda@ucl.ac.uk
JAMES BANKS, Institute for Fiscal Studies & University College
Email: J.W.BANKS@UCL.AC.UK
HANS-MARTIN VON GAUDECKER, VU University Amsterdam - Department of Economics, Netspar
Email: hmgaudecker@web.de

We study the effect of permanent income innovations on health for a prime-aged population. Using information on more than half a million individuals sampled over a twenty-five year period in three different cross-sectional surveys we aggregate data by date-of-birth cohort to construct a synthetic cohort dataset with details of income, expenditure, socio-demographic factors, health outcomes and selected risk factors. We then exploit structural and arguably exogenous changes in cohort incomes over the eighties and nineties to uncover causal effects of permanent income shocks on health. We find that such income innovations have little effects on a wide range of health measures, but do lead to increases in mortality and risky health behaviour.

PAUL FRONSTIN, Employee Benefit Research Institute (EBRI)
Email: FRONSTIN@EBRI.ORG

This paper examines the administrative and implementation issues that arise with capping the exclusion of employment-based health coverage from workers' taxable income, which is likely to be at the center of the upcoming national debate on overhauling the U.S. health coverage system, a top priority of both the new Democratic majority in Congress and President Barack Obama. It first summarizes the current tax treatment of health coverage. It discusses reasons why there is interest in changing the tax treatment of health coverage. It then discusses implementation issues for employers and implications for workers and retirees. Lessons from the repeal of Sec. 89 of the Tax Reform Act of 1986 (TRA '86) are also discussed, since that experience relates to regulations valuing health coverage.

This paper only examines capping the tax exclusion of employment-based health coverage from workers' taxable income. It does not examine changing the deductibility of health coverage and health benefits as a business expense for employers. It also does not address tax credits or past proposals to provide a tax break to individuals who purchase health insurance directly from an insurance company. See Fronstin (2006), Fronstin and Salisbury (2007) and the references within those papers for a more detailed treatment of issues related to leveling the tax-treatment playing field between employment-based health benefits and non-group insurance and the impact on pooling and the future of employment-based health coverage. This paper also does not address implementation issues involving the Internal Revenue Service (IRS).

SHERRY GLIED, Columbia University - Mailman School of Public Health, National Bureau of Economic Research (NBER)
Email: sag1@columbia.edu

This paper examines the economic rationale of affordability exemptions in the context of a health insurance mandate. On its face, an affordability exemption makes little sense - it exempts people from purchasing a good that policymakers believe benefits them. I provide an economic definition of affordability and discuss how it is implemented in the contexts of food, housing, and health care. Affordability standards are frequently used in food and housing policy making, but both empirically and theoretically health care operates quite differently than do these other merit goods. These differences help explain why the use of affordability in health policymaking is so different from its use in these other contexts. I conclude with a discussion of the relationship between mandates and exemptions in other health care systems.

ADAM WAGSTAFF, World Bank - Development Research Group
Email: awagstaff@worldbank.org

This paper exploits the transitions between tax-financed health care and social health insurance in the OECD countries over the period 1960-2006 to assess the effects of adopting social health insurance over tax finance on per capita health spending, amenable mortality, and labor market outcomes. The paper uses regression-based generalizations of difference-in-differences and instrumental variables to address the possible endogeneity of a country's health system. It finds that adopting social health insurance in preference to tax financing increases per capita health spending by 3-4 percent, reduces the formal sector share of employment by 8-10 percent, and reduces total employment by as much as 6 percent. For the most part, social health insurance adoption has no significant impact on amenable mortality, but for one cause - breast cancer among women - social health insurance systems perform significantly worse, with 5-6 percent more potential years of life lost.

EDWARD A. ZELINSKY, Benjamin N. Cardozo School of Law
Email: ZELINSKY@PRODIGY.NET

For the foreseeable future, employer-provided health care will remain the central means of financing medical coverage for working Americans and their families. There are, moreover, strong normative grounds for perpetuating the existing system of employer-sponsored medical coverage. Among these grounds, an employer-based system is our best means for constraining medical costs, given the inability of the political process to control health care outlays.

KATHRYN L. MOORE, University of Kentucky College of Law
Email: kmoore@pop.uky.edu

This article examines the recent trend of transferring employer retiree health care liabilities to VEBAs. After providing a brief history of retiree health benefits and an overview of the basic tax rules governing VEBAs, the article explains the difference between traditional VEBAs and the new retiree health VEBAs. The article then discusses the advantages and limitations of the new VEBAs. The article concludes that the new VEBAs may be an appropriate vehicle for pre-funding retiree health benefits for some employers, particularly financially distressed employers with significant retiree health liabilities and large union forces, but they are not a panacea for the country's health care financing woes.

TOM BAKER, University of Pennsylvania Law School
Email: tombaker@law.upenn.edu
PETER SIEGELMAN, University of Connecticut - School of Law
Email: peter.siegelman@law.uconn.edu

Over one third of all uninsured adults in the U.S. below retirement age are between 19 and 29 years old. When young adults, especially men, age out of the dependent care coverage provided by their parents' employment benefits or public health insurance, they often go without, even when buying insurance is mandatory and sometimes even when that insurance is a low cost employment benefit. This paper proposes a new form of health insurance targeted at this group. It would pay a cash bonus to those who turn out to be right in their belief that they did not really need health insurance. The concept comes from the tontine life insurance that fueled the rise of the U.S. insurance industry in the late 19th Century. Tontine life insurance paid a deferred dividend to policyholders who survived and faithfully paid their insurance premiums for a defined period, usually 20 years. The amount of the dividend depended on how many people were left in the insurance pool when the dividend was paid. A largely forgotten casualty of the 1906 pacification of the life insurance industry, the tontine idea holds great promise for making health insurance attractive to the invincibles today. These insurers seem to have understood some things about human nature that were largely forgotten over the intervening 100 years, only to be rediscovered more recently under the rubric of behavioral economics. The tontine feature frames the health insurance purchase as a smart investment, rather than a way to spend money for something the customer does not think he needs. Tontines also make insurance more attractive to the uninsured, without wasting funds by subsidizing those who are already covered. Our contribution is to identify a particular class of individuals (the invincibles), show how a specific cognitive bias accounts for their irrational behavior (optimism bias), and design an insurance mechanism (tontines or deferred dividends) to overcome the effects of this bias.