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Small Business Economics

Erschienen in:

01.02.2013

Health insurance provision and labor contracts for small firms

verfasst von: Chu-Shiu Li, Chwen-Chi Liu, Yu-Chen Kuo, Chen-Sheng Yang

Erschienen in: Small Business Economics | Ausgabe 2/2013

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Abstract

Healthcare reform in the USA requires all Americans to buy health insurance and businesses above a certain size to offer healthcare coverage to their employees by 2014. Understanding why some entrepreneurs do not provide employer-based health insurance is important and might help to solve future health insurance problems. Using two unique features which have not yet been discussed in the literature, namely, efficiency–wage theory and a compensation package of monetary wage and health insurance coverage, we provide here a theoretical foundation to why small firms are less likely to offer health insurance and are more likely to have employees with only a weak preference for acquiring health insurance. To reach the goal of health insurance coverage for all, one feasible solution is to allow small firms or individuals to pool together and pay a lower insurance premium.

Vorheriger Artikel Entrepreneurial skills and workers’ wages in small firms

Nächster Artikel Firm size and efficiency in the German mechanical engineering industry

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Fronstin (2006) indicates that about 62% of nonelderly Americans are covered by employer-based health insurance programs.

To avoid bearing the risk of expensive premiums and decrease the burden of health insurance, small firms usually adopt various methods, such as restricting employees’ utilization of healthcare services, offering less insurance coverage, or employing healthier workers. This results in employment distortions and workers with high health costs switching to large firms.

The literature lacks a discussion on the causality between the turnover rate and the lack of health insurance. As pointed out by one referee, the causality could go the other way: small firms do not provide health insurance (or other benefits) and there is therefore a high turnover rate among workers.

For simplicity, our model assumes that health insurance premiums are not tax deductible. In the USA, tax laws on deductions for the health insurance premium vary among states. In some states, the health insurance payment can be treated as medical costs, which are tax deductible. However, for other states, the health insurance premium is not tax deductible.

Employees who leave their current firm are eligible to extend their insurance coverage for months through COBRA. Under this circumstance, a lazy worker’s expected utility (\( V_{i}^{L} \)) can be rewritten as \( V_{i}^{L} = (1 - \lambda + \mu \lambda )ph_{i} U[(1 - t_{P} )w - a\pi s] + (1 - h_{i} )[1 - p(1 - \lambda )(1 - \mu )]U(s) - (1 - \mu )(1 - \lambda )ph_{i} U[(1 - t_{P} )w] + h_{i} p\mu U(z) \).

As a result of\( (\partial w/\partial V_{i}^{H} \left| {_{{\bar{s}}} } \right.) - (\partial w/\partial V_{i}^{L} \left| {_{{\bar{s}}} } \right.) = - \{ p\mu /h_{i} (1 - p\mu )U^{\prime}[(1 - t_{P} )w - a\pi s]\} < 0 \), the magnitude of a shift in \( V_{i}^{L} \) will be higher than that in \( V_{i}^{H} \) if the expected utilities of high-effort and low-effort workers increase one unit simultaneously. This means that workers making less of an effort must obtain a higher wage, and the expected utilities for both high- and low-effort workers are the same. As the opportunity cost of losing job increases when employers increase wage, employers can decrease fringe benefits to compensate for the opportunity cost to obtain non-shirking workers. Hence, point f is southeast of point g.

The denominator of Eq. 5 is \( (\partial V_{i}^{H} /\partial s) - (\partial V_{i}^{L} /\partial s) \). Since insurance coverage is an economic product, higher insurance coverage increases the utility of workers. Under the condition of \( \partial V_{i}^{H} /\partial s > 0 \), the value of Eq. 5 is negative. Therefore, NSC_i is downward sloping.

R _A is defined as the Arrow–Pratt coefficient of absolute risk aversion. From Mossin (1968), if R _A is monotonically decreasing, then \( - U^{\prime\prime}[(1 - t_{P} )w - a\pi s] \ge - U^{\prime\prime}[(1 - t_{P} )w] \), implying T < 0.

We can ensure the existence of point E. From Eq. 3, \( U[(1 - t_{P} )w] = U(z) + ({\text{e / }}h_{i} p\mu ) \) if s = 0. This implies that point F is located on the RHS of point G due to h _g > h _b, as shown in Fig. 2. In contrast, under the condition \( (1 - t_{P} )w = a\pi s \), Eq. 3 can be rewritten as \( (1 - p + p\lambda - p\mu \lambda )(1 - h_{i} )U(s) + p(1 - \mu )(1 - \lambda )h_{i} U(a\pi s) - h_{i} p\mu U(z) - e = 0 \), indicating that NSC _g corresponds to higher health coverage at the locus of \( (1 - t_{P} )w = a\pi s \).

To diminish the effect of adverse selection on contributory plans, Black and Skipper (2000) indicate that most insurers require at least 75% of the employees to be enrolled in the plan. If the group is larger, the expected expense per person insured is less and can be estimated more precisely.

The monitoring cost (k) might exist as a formal cost. For example, the firm can hire supervisors or install technical equipment to monitor workers. Thus, these monitoring costs are tax-deductible. An anonymous referee deserves thanks for pointing out this related analysis.

Baicker and Chandra (2006) indicate that a 10% increase in premiums causes a compensation decrease in wages of 2.3%.

According to Aaron and Bosworth (1994), an insurance premium for groups of <10 employees is standardly 25–30% more than that for groups of ≥50.

From Eq. 14, we have \( (1 - a + t_{P} )a \, s \, R_{\text{A}} \pi_{1}^{2} + B_{1} \pi_{1} + C_{1} = 0 \).

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Titel: Health insurance provision and labor contracts for small firms
verfasst von: Chu-Shiu Li
Chwen-Chi Liu
Yu-Chen Kuo
Chen-Sheng Yang
Publikationsdatum: 01.02.2013
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 2/2013
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-011-9371-2

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