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Health insurance, cost expectations, and adverse job turnover

  • Randall P. Ellis
  • Ching‐to Albert Ma

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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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
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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  7. 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.
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