In President Bush's January 23, 2007 State of the Union address he proposed changes to the federal tax code as well as other incentives to increase health insurance coverage. He proposed a standard deduction for individuals and families who purchase private health insurance in the individual market. In addition, he advocated grants to states that provide incentives for coverage for low-income citizens. Proponents of the President's plan argue it would eliminate the current bias in favor of health insurance obtained through employers. Mark V. Pauly, Ph.D., Bendheim Professor of Health Care Systems, Business and Public Policy, Insurance and Risk Management, and Economics, at the University of Pennsylvania, has focused much of his research on the individual insurance market, particularly how it might be used in combination with tax incentives, to expand health insurance coverage.
Much of Dr. Pauly's research can help inform the debate about how the President's proposals are likely to affect the health insurance market. Dr. Pauly has studied consumer behavior and found that both group and individual insurance coverage have advantages and disadvantages. He argues that group insurance in an organization is supported by the current tax structure where income compensation received in the form of employer-paid insurance premiums is excluded from income and payroll taxes. He notes that group insurance is moderately less costly than individual insurance, but consumers who use the individual insurance market have a wider choice of portable and stable insurance options. For workers in very small firms, the difference in costs can be quite small.
Some of Dr. Pauly's work provides descriptive evidence on how group and individual markets operate. In a project partially supported by HCFO, he examined the contention that group insurance "pools risk" more effectively than individual insurance. Dr. Pauly's findings suggest that differences between the markets are smaller than they are commonly believed to be. He found some degree of adverse selection in group insurance, which limits the degree of risk pooling. Older workers covered by group insurance appear to forgo larger amounts of wages (to reflect the higher cost of their coverage) than do younger workers. In the individual insurance market, current state and federal law requires "guaranteed renewability at class average premiums" so an insurer will not single out people who become higher risk for higher than average premium increases. This has resulted in premiums actually paid for individual insurance that vary much less than proportionately with risk.
Dr. Pauly also has studied the effects of subsidies on insurance markets. His research promotes a flexible tax credit/voucher system. His research suggests that such a tax credit would assist people in obtaining insurance and provide tax equity. Much of Dr. Pauly's past and ongoing research is applicable to the current policy debate regarding the restructuring of federal tax incentives to promote the purchase of health insurance. His work also can better inform discussions about the potential impact of various state-based incentives to increase coverage among those with low incomes.
Before his appointment to the Wharton School in 1983, Dr. Pauly was on the faculty at Northwestern University. He has served as Executive Director of the Leonard Davis Institute of Health Economics and Vice Dean for Doctoral Programs at the University of Pennsylvania. He was commissioner on the Physician Payment Review Commission, and also has served on state commissions to study insurance and on Institute of Medicine panels looking at accountability in Medicare, vaccine financing, and substance abuse treatment.
In addition to continuing his research on the private insurance market in the United States, he is studying the prospects for private health insurance in developing countries. Dr. Pauly and colleagues published their work in this area in a 2006 Health Affairs article which identified three possible causes of small or nonexistent markets for private insurance in developing countries: inadequate demand because of low risk-aversion or misperception; restrictions on supply due to regulation; and high administrative costs. Pauly has recently shifted his attention to examining conceptual foundations for cost-benefit analysis of drugs and incentives in managed care.