Tax incentives and the demand for private health insurance

Abstract

We analyze the effect of an individual insurance mandate (Medicare Levy Surcharge) on the demand for private health insurance (PHI) in Australia. With administrative income tax return data, we show that the mandate has several distinct effects on taxpayers' behavior. First, despite the large tax penalty for not having PHI coverage relative to the cost of the cheapest eligible insurance policy, compliance with mandate is relatively low: the proportion of the population with PHI coverage increases by 6.5 percentage points (15.6%) at the income threshold where the tax penalty starts to apply. This effect is most pronounced for young taxpayers, while the middle aged seem to be least responsive to this specific tax incentive. Second, the discontinuous increase in the average tax rate at the income threshold created by the policy generates a strong incentive for tax avoidance which manifests itself through bunching in the taxable income distribution below the threshold. Finally, after imposing some plausible assumptions, we extrapolate the effect of the policy to other income levels and show that this policy has not had a significant impact on the overall demand for private health insurance in Australia.

Nonparametric kernel estimation of the impact of tax policy on the demand for private health insurance in Australia

“…As one would expect, the estimates increased with the bandwidth, but were reasonably robust. Our estimated effect is larger than that was estimated by Stavrunova & Yerokhin (). The difference could be due to a number of reasons.…”

“…the LHC, have been studied in Butler (), Frech, Hopkins & MacDonald (), Palangkaraya & Yong (), Palangkaraya et al . (), Ellis & Savage () and Stavrunova & Yerokhin (). For example, using a structural model, Ellis & Savage () investigated the impact of the series of reforms.…”

“…They interpret the major driver of the increased enrolment as a response to a deadline and advertising blitz, rather than a pure price response. Nevertheless, with the exception of Stavrunova & Yerokhin (), the effect of MLS seems not to have been studied separately. Stavrunova & Yerokhin () examine the impact of MLS on the take up of private health insurance by exploring the relationship between income level and private health insurance coverage.…”

“…Nevertheless, with the exception of Stavrunova & Yerokhin (), the effect of MLS seems not to have been studied separately. Stavrunova & Yerokhin () examine the impact of MLS on the take up of private health insurance by exploring the relationship between income level and private health insurance coverage. The data they used were aggregate rather than individual data, although from the same source as our data.…”

“…There is a large literature that uses tax changes (either over time or across individuals) as a source of variation in the after‐tax price of health insurance, to make inferences on the demand of PHI. However, with a few exceptions such as Ellis & Savage () and Stavrunova & Yerokhin (), most of the studies are for US employer provided health insurance. See Gruber & Poterba (), Finkelstein (), Rodriguez & Stoyanova (), and Buchmueller, Didardo & Valletta (), for a few examples.…”