An investigation of the market for employer-provided group health insurance in the United States

In this dissertation I study the role of employer-provision of health insurance in alleviating adverse selection problems inherent in the health insurance market. Because employer-provided health insurance premiums are not treated as part of an employee's taxable income and are tax deductible for employers, the U.S. tax code creates a subsidy towards the purchase health insurance through employers. Some of the important questions characterizing the literature on employer-provided health insurance that I address are: Given the adverse selection problem inherent in the sale of insurance, is it possible to prove the existence of equilibrium? Can we distinguish empirically between separating and pooling equilibria? What is the price elasticity of demand for employer-provided health insurance? An accurate estimate of the price elasticity of demand is required to estimate the effect of eliminating or reducing the subsidy.; Several studies examine the market for employer-provided health insurance in the U.S. The theoretical side of the literature struggles with existence of equilibrium due to adverse selection problems inherent in the sale of insurance. The empirical side of the literature has trouble estimating the price elasticity of demand for health insurance, in part, because many of the empirical papers are not based upon any of the theoretical work. The purpose of chapter two is to present a model of the market for health insurance that addresses both problems. Incorporating employers providing insurance allows existence of equilibrium and lends itself easily to empirical applications. Unlike Rothschild and Stiglitz (1976), this chapter shows that both a unique separating equilibrium and multiple pooling equilibria exist.; The purpose of the third chapter is to provide an empirical complement to the theoretical model of the market for employer-provided health insurance presented in the second chapter. The theoretical model presented in the second chapter has multiple equilibria—both pooling and separating. It also implies a structural model that is empirically estimated in this chapter with data from the 1987 National Medical Expenditure Survey. This structural model is used to calculate the price elasticity of demand for health insurance and to test for pooling versus separating equilibria. The price elasticity estimate found, −2.18, is much more elastic than previous cross-sectional studies. The data also supplies evidence of a pooling equilibrium.; The purpose of the fourth chapter is to present an existence theorem in a differentiated commodity general equilibrium model with a production sector, consumption sets featuring indivisibilities, an infinite number of both consumers and commodities, and continuous price functions. In order to prove such a theorem the description of consumers and commodities presented in Mas-Colell (1975) is slightly modified and combined with the description of the firm presented in Jones (1984). This theorem is used to prove the existence of multiple pooling and a unique separating equilibrium in the second chapter.