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Health insurance, cost expectations, and adverse job turnover

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  • Randall P. Ellis
  • Ching‐to Albert Ma

Abstract

Because less healthy employees value health insurance more than the healthy ones, when health insurance is newly offered job turnover rates for healthier employees decline less than turnover rates for the less healthy. We call this adverse job turnover, and it implies that a firm's expected health costs will increase when health insurance is first offered. Health insurance premiums may fail to adjust sufficiently fast because state regulations restrict annual premium changes, or insurers are reluctant to change premiums rapidly. Even with premiums set at the long run expected costs, some firms may be charged premiums higher than their current expected costs and choose not to offer insurance. High administrative costs at small firms exacerbate this dynamic selection problem. Using 1998–1999 MEDSTAT MarketScan and 1997 Employer Health Insurance Survey data, we find that expected employee health expenditures at firms that offer insurance have lower within-firm and higher between‐firm variance than at firms that do not. Turnover rates are systematically higher in industries in which firms are less likely to offer insurance. Simulations of the offer decision capturing between‐firm health‐cost heterogeneity and expected turnover rates match the observed pattern across firm sizes well. Copyright (C) 2010 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.1571
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 20 (2011)
Issue (Month): 1 (January)
Pages: 27-44

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Handle: RePEc:wly:hlthec:v:20:y:2011:i:1:p:27-44

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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Keywords: health insurance ; job turnover ; adverse selection ;

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  1. Robin W. Boadway & Maurice Marchand, 1990. "The Use of Public Expenditure for Distributive Purpose," Working Papers 796, Queen's University, Department of Economics.
  2. Ching-to Albert Ma & Michael Riordan, 1997. "Health Insurance, Moral Hazard, and Managed Care," Papers 0080, Boston University - Industry Studies Programme.
  3. Boadway, Robin & Marchand, Maurice, 1995. "The Use of Public Expenditures for Redistributive Purposes," Oxford Economic Papers, Oxford University Press, vol. 47(1), pages 45-59, January.
  4. Ritva Immonen & Ravi Kanbur & Michael Keen & Matti Tuomala, 1994. "Tagging and taxing: the optimal use of categorical and income information in designing tax/transfer schemes," IFS Working Papers W94/05, Institute for Fiscal Studies.
  5. Blackorby, Charles & Donaldson, David, 1994. "Information and Intergroup Transfers," American Economic Review, American Economic Association, vol. 84(2), pages 440-47, May.
  6. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  7. Blackorby, Charles & Donaldson, David, 1988. "Cash versus Kind, Self-selection, and Efficient Transfers," American Economic Review, American Economic Association, vol. 78(4), pages 691-700, September.
  8. Arrow, Kenneth J, 1971. "A Utilitarian Approach to the Concept of Equality in Public Expenditure," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 409-15, August.
  9. Immonen, Ritva, et al, 1998. "Tagging and Taxing: The Optimal Use of Categorical and Income Information in Designing Tax/Transfer Schemes," Economica, London School of Economics and Political Science, vol. 65(258), pages 179-92, May.
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Cited by:
  1. Chu-Shiu Li & Chwen-Chi Liu & Yu-Chen Kuo & Chen-Sheng Yang, 2013. "Health insurance provision and labor contracts for small firms," Small Business Economics, Springer, vol. 40(2), pages 325-334, February.
  2. Phillip B. Levine & Robin McKnight & Samantha Heep, 2009. "Public Policy, Health Insurance and the Transition to Adulthood," NBER Working Papers 15114, National Bureau of Economic Research, Inc.

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