THE IMPACT OF INSURANCE SUBSIDIES ON SELF‐EMPLOYMENT: DO STATE NON‐GROUP HEALTH INSURANCE REGULATIONS MATTER?

I. INTRODUCTION The rising cost of health care, the large number of uninsured (estimated to be 50 million in 2009), and the perception that the individual health insurance market is inaccessible to those who do not receive health insurance from their employer all have led to numerous health regulation reform efforts at the state and federal levels. For example, the Patient Protection and Affordable Care Act of 2010 (PPACA) attempts to ameliorate these problems by, among other things, making several changes to regulations in the private non-group health insurance market. These changes include modified community rating regulations (which will prevent insurance companies from charging different premiums based on health status), guaranteed issue regulations (which prevent them from excluding anyone because of pre-existing conditions), subsidies for low-income taxpayers to purchase health insurance, subsidies for small firms to provide health insurance for their employees, and mandates for individuals to purchase health insurance. The resulting changes in the cost and availability of health insurance could have significant effects on labor market decisions as the job-lock literature has shown, (1) and on the decision to be self-employed as some recent papers have shown. (2) However, we know very little about how different insurance market regimes affect the responsiveness of labor market decisions to health insurance prices. In this paper, we examine insurance markets a number of years after several states implemented major changes that included guaranteed issue and community rating regulations (among other changes), but did not incorporate individual and small business subsidies or an individual mandate. Namely, we estimate whether the decision to be self-employed in response to a change in the after-tax price of health insurance while self-employed differed between states that passed these regulations and those that did not. During the 1990s some states imposed regulatory measures with the aim of reducing the perceived inequities and efficiencies in the non-group market. Several studies have examined how non-group markets were affected by the enactment of these changes, with a focus on states that enacted community rating and guaranteed issue regulations, (3) while several other studies tried to estimate the effect of community rating on premiums. (4) In subsequent years, changes in tax policy led to decreases in the after-tax price of health insurance in the non-group market among those that are self-employed, as the share of health insurance premiums for self-employed individuals that are deductible for federal income tax purposes increased from 60% in 1999 to 70% in 2002 and to 100% in 2003 due to the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1998 (OCESA). Numerous states also followed suit, increasing the share of premiums deductible at the state level. Two published papers and one working paper have examined the effect of these tax policy changes on the propensity to be self-employed. (5) To our knowledge the only paper that estimates the effect of state regulation in the non-group health insurance market on the decision to be self-employed is DeCicca (2010). That paper estimates the effect of a non-group health insurance market reform in New Jersey in 1993, which included a large set of provisions which were intended to increase access to the individual health insurance market, including mandating guaranteed issue and renewability of policies, and pure community rating. Using data from the Behavioral Risk Factor Surveillance System (BRFSS) spanning the years 1991 and 1996, DeCicca compares changes in the level of self-employment in New Jersey to those in Pennsylvania (or, alternatively, to other non-community rated states in the northeast) in a difference-in-differences model. He finds that the reform increased self-employment levels by 15% to 25% in the early years after the policy change. …