ROBERT W. FAIRLIE, University of California, Institute for the Study of Labor (IZA), RAND Corporation
Email: rfairlie@ucsc.edu
REBECCA A. LONDON, Stanford University
Email: rlondon@stanford.edu

Using matched data from the 1996 to 2004 Current Population Survey (CPS), we examine racial patterns in annual transitions into and out of health insurance coverage. We first decompose racial differences in static health insurance coverage rates into group differences in transition rates into and out of health insurance coverage. The low rate of health insurance coverage among African-Americans is due almost entirely to higher annual rates of losing health insurance than whites. Among the uninsured, African-Americans have similar rates of gaining health insurance in the following year as whites. Estimates from the matched CPS also indicate that the lower rate of health insurance coverage among Asians is almost entirely accounted for by a relatively high rate of losing health insurance. In contrast to these findings, differences in health insurance coverage between Latinos and whites are due to group differences in both the rate of health insurance loss and gain. Using logit regression estimates, we also calculate non-linear decompositions for the racial gaps in health insurance loss and gain. We find that two main factors are responsible for differences in health insurance loss between working-age whites and minorities: job loss and education level. Higher rates of job loss account for 30 percent of the health insurance gap for African-Americans and Asians, and 16 percent of the health insurance gap for Latinos. Lower levels of education explain roughly 15 percent of the gap for African-Americans and Latinos (Asians' higher levels of education serve to close the gap). Higher rates of welfare and SSI participation among African-Americans also serve to widen the gap in health insurance loss by 8 percent.

AMY MONAHAN, University of Missouri School of Law
Email: monahana@missouri.edu
MARK A. HALL, Wake Forest University - School of Law
Email: mhall@law.wfu.edu

Several states have either passed or proposed legislation requiring employers to offer their employees the ability to pay for health insurance on a pre-tax basis through a "cafeteria" (or "premium-only") plan under section 125 of the tax code (a "section 125 plan"). Prior to these initiatives, many employers voluntarily established section 125 plans for this purpose. Recently, some authorities have raised a serious concern about the legality of this arrangement under the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA). Specifically, they maintain that, under the tax code, section 125 plans cannot be used to purchase medically-underwritten individual insurance because doing so would violate HIPAA's non-discrimination provisions for group plans. This paper explains the basis for this legal concern, and presents contrary legal arguments. It concludes that the current state of the law is unclear and is subject to change.

RANDALL CEBUL, Case Western Reserve University - Center for Health Care Research and Policy
Email: rdc@case.edu
JAMES B. REBITZER, Case Western Reserve University - Department of Economics, Institute for the Study of Labor (IZA), National Bureau of Economic Research (NBER)
Email: JAMES.REBITZER@WEATHERHEAD.CWRU.EDU
LOWELL J. TAYLOR, Carnegie Mellon University - H. John Heinz III School of Public Policy and Management
Email: lt20@andrew.cmu.edu
MARK VOTRUBA, Case Western Reserve University - Weatherhead School of Management
Email: mark.votruba@case.edu

Health insurance is a complex, multi-attribute product and this creates search frictions that can distort market outcomes. We study the effect of frictions in the market for employer based health insurance. We find that frictions are most severe in the "fully insured" part of the group health insurance market and we estimate that frictions in this market segment cause a quarter of the consumer surplus to shift from policy-holders to insurers (a transfer of 32.5 billion dollars in 1997). Our analysis also suggests that frictions in insurance markets also reduce incentives to invest in future health.

JAMES C. YOUNG, Northern Illinois University - Department of Accountancy
Email: M20JCY1@WPO.CSO.NIU.EDU

Without inflation adjustments to key portions of the tax system, individuals would be faced with an erosion of their purchasing power. Beginning in 1985, Congress implemented an indexation procedure to adjust various income tax components, including the tax rate schedules, standard deduction, and personal and dependency exemptions. Although suspended by the Tax Reform Act of 1986, indexation resumed in 1989 and now applies to many items in the tax system.

In this report, Young discusses 2009 inflation adjustments to specific portions of the individual tax system that are tied to a Consumer Price Index year ending in August. Items adjusted by this indexation procedure include the tax rate schedules, standard deductions, exemptions (and related phaseout), the overall limit on itemized deductions, the annual gift tax exclusion, and some computational elements related to the unearned income of minor children, the child credit, the earned income tax credit, adoption expenses, educational savings bonds, education credits, education loan interest, qualified transportation fringe benefits, medical savings accounts (Archer MSAs), health savings accounts, long-term care insurance premiums, long-term care insurance benefits, traditional and Roth IRA income phaseouts and contribution limits, and the section 179 expense election.