Labor Supply Response to Income Cutoffs of Health Insurance in the Massachusetts Reform

Abstract

This paper analyzes the labor supply response to income cutoffs of a subsidized health insurance program in the Massachusetts reform. Subsidies in the program are based on household income and have explicit income cutoffs. This feature creates non- linear budget constraints for the households’ consumption, and potentially distorts their income and labor supply. I test the existence of income manipulation using the regression discontinuity approach. Using data from the American Community Survey, I find clear evidence of income manipulation around the cutoffs of 150% and 300% Federal Poverty Level (FPL). The 150% FPL is the first cutoff and the cutoff between plans with zero out-of-pocket premiums and non-zero out-of-pocket premiums, and the manipulation is concentrated among the self-employed. The 300% FPL is the cutoff with the largest cost difference for enrollee, and the manipulation is concentrated among the wage workers. I construct a structural model to estimate the elasticity of labor supply with respect to wage rate using the discontinuity evidence. Based on the estimation results, I calculate the welfare loss, which is measured as the change of income, due to the subsidized program.