4 Pages Posted: 2 Aug 2011
Date Written: June 1, 2011
A common argument in the US health policy debate is that rising health insurance costs, coupled with the tying of insurance to employers, inhibits the survival and growth of entrepreneurial firms. Economic theory suggests that these costs may indeed adversely affect small businesses: the firms may be unable to pass on to employees the full cost of benefits due to downward nominal wage rigidities or labor market competition with large firms. I use the Kauffman Firm Survey of businesses beginning formal operations in 2004 to measure the effects of rising health costs on firm survival, employment growth, and propensity to offer insurance in each subsequent year. I exploit variation in insurance premia over time and across states, instrumenting for endogenous premium growth using insurance market regulation and tort reform. Estimates suggest that firms facing higher growth in health costs are more likely to offer insurance, possibly due to the higher value of insurance when potential loss rises. I find no significant effect of rising health costs on firm survival or employment growth and can rule out large negative effects.
Keywords: health insurance, benefit, incidence, small business, entrepreneurship, Kauffman Firm Survey
JEL Classification: H22, I11, J23, J33
Suggested Citation: Suggested Citation