The effect of tax subsidies to employer-provided supplementary health insurance: evidence from Canada

Abstract

This paper presents new evidence of the effect of the tax subsidy to employer-provided health insurance on coverage by such insurance. I study the effects of a 1993 tax change that reduced the tax subsidy to employer-provided supplementary health insurance in Quebec by almost 60%. Using a differences-in-differences methodology in which changes in Quebec are compared to changes in other provinces not affected by the tax change, I find that this tax change was associated with a decrease of about one-fifth in coverage by employer-provided supplementary health insurance in Quebec. This corresponds to an elasticity of employer coverage with respect to the tax price of about −0.5. Non-group supplementary health insurance coverage rose slightly in Quebec relative to other provinces in response to the reduction in the tax subsidy to employer-provided (group) coverage. But the increase in the non-group market offset only 10–15% of the decrease in coverage through an employer. The decrease in coverage through an employer was especially pronounced in small firms, where the tax subsidy appears much more critical to the provision of supplementary health insurance than it does in larger firms.