How Elastic is the Firm's Demand for Health Insurance?

Abstract

The National Compensation Survey, which underlies theEmployment Cost Index (ECI), is used to assess the impact of tax subsidies on afirm's insurance offering, insurance spending, and on the distribution ofcharacteristics of workers within each firm from 1983 to 1995. Information wascollected from the Bureau of Labor Statistics' ECI database. Results from basic tax price regression analyses show significant negativecoefficients for the firm's decision to offer insurance and the amount ofspending on the offering. Insurance offering rises with firm size, and as taxprice increases, insurance spending decreases. Alternative tax price measuresreveal no significant findings for weighting functions. Elasticity analysisshows a reasonably sized elasticity of insurance offering after-tax prices anda larger elasticity of insurance spending due to premium sharing. Additionally,it is found that small firms are particularly sensitive to taxes in theirinsurance offering, while large firms are sensitive to taxes in theirconditional spending decisions. Comparing this method of analysis to alternative approaches reveals higherestimated elasticities of offerings and lower estimated elasticities ofconditional spending. A reduction in employer-provided health insurancespending can be achieved by three possible tax reforms. (NEE)

Keywords: Employment Cost Index (US Bureau of Labor Statistics), National Compensation Survey (U.S. Dept of Labor), Taxes, Taxes, Public policies, Institutional reforms, Tax subsidies, Health insurance, Employee benefits