Question

Why do health economists conclude that tax-exempt employer-purchased health insurance has distorted consumers’ choices in healthcare and diminished consumer incentives to be concerned with the cost of medical services?

Answer 1

Health insurance industry works on the margins which are made when an individual doesnot avail the health insurance . The industry is risk based. When the govt decides to intervine in the industry by giving subsidies by exempting the money from tax , the employer actually decides to put in more money in insurance of employees, increasing the incentive for employees to use the invested money even more. So the precaution scale for individuals fall . If the market is not working with precaution , the claim for the insurance will automatically rise. The cost for individual is automatically diminished as the concern for medical expenses has fallen.

Since these risk based assumptions relating to cost and precautions are all distorted , the health economist conclude the consumer choices are also distorted in the insurance market and healthcare choices.