The Macroeconomic Consequences of Financing Health Insurance

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Abstract

Employer-financed health insurance systems like those used in the United States distort firms’ labor demand and adversely affect the economy. Since such costs vary with employment rather than hours worked, firms have an incentive to increase output by increasing worker hours rather than employment. Given that the returns to employment exceed the returns to hours worked, this results in lower levels of employment and output. In this paper, we construct a heterogeneous agent general equilibrium model where individuals differ with respect to their productivity and employment opportunities. Calibrating the model to the U.S. economy, we generate steady state results for several alternative models for financing health insurance: one in which health insurance is financed primarily through employer contributions that vary with employment, a second where insurance is funded through a non-distortionary, lump-sum tax, and a third where insurance is funded by a payroll tax. We measure the effects of each of the alternatives on output, employment, hours worked, and wages.

Keywords

Health care financing Employer-based health insurance Universal health care 

JEL

E62 O41 C68 
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Copyright information

© International Atlantic Economic Society 2012

Authors and Affiliations

  1. 1.Department of EconomicsElon UniversityElonUSA

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