Avoiding Health Insurance Crowd-Out: Evidence from the Medicare as Secondary Payer Legislation

The cost of efforts to expand health insurance coverage to the currently uninsured increases when people who would otherwise purchase private insurance obtain subsidized public coverage. Legislators are increasingly interested in mechanisms that target insurance benefits to those who need them most. This paper investigates the effects of one of the first such targeting efforts, the 1982 Medicare as Secondary Payer (MSP) provisions. The MSP rules require employers who offer insurance coverage to their employees under 65 to offer coverage on the same terms to their Medicare-eligible employees. This coverage then becomes 'primary' to Medicare. We examine the incidence of this implicit tax, the magnitude of tax avoidance efforts, and the extent of tax compliance. We find little evidence that the MSP rules affected the wages or employment of affected workers. We find weak evidence suggesting that the MSP shifted the composition of employment of older workers toward MSP-exempt jobs. We find strong evidence of low compliance with the MSP rules. Our results cast doubt on the efficacy of provisions designed to reduce crowd-out in new health insurance programs.