Dynamic Inefficiencies in Employment-Based Health Insurance System Theory and Evidence

61 Pages Posted: 10 Sep 2007 Last revised: 16 Jul 2022

See all articles by Hanming Fang

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

Date Written: September 2007

Abstract

We investigate how the employment-based health insurance system in the U.S. affects individuals' life-cycle health-care decisions. We take the viewpoint that health is a form of human capital that affects workers' productivities on the job, and derive implications of employees' turnover on the incentives to undertake health investment. Our model suggests that employee turnovers lead to dynamic inefficiencies in health investment, and particularly, it suggests that employment-based health insurance system in the U.S. might lead to an inefficient low level of individual health during individuals' working ages. Moreover, we show that under-investment in health is positively related to the turnover rate of the workers' industry and increases medical expenditure in retirement. We provide empirical evidence for the predictions of the model using two data sets, the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS). In MEPS, we find that employers in industries with high turnover rates are much less likely to offer health insurance to their workers. When employers offer health insurance, the contracts have higher deductibles and employers' contribution to the insurance premium is lower in high turnover industries. Moreover, workers in high turnover industries have lower medical expenditure and undertake less preventive care. In HRS, instead we find that individuals who were employed in high turnover industries have higher medical expenditure when retired. The magnitude of our estimates suggests significant degree of intertemporal inefficiencies in health investment in the U.S. as a result of the employment-based health insurance system. We also evaluate and cast doubt on alternative explanations.

Suggested Citation

Fang, Hanming and Gavazza, Alessandro, Dynamic Inefficiencies in Employment-Based Health Insurance System Theory and Evidence (September 2007). NBER Working Paper No. w13371, Available at SSRN: https://ssrn.com/abstract=1012825

Hanming Fang (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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