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Why Do Firms Use Insurance to Fund Worker Health Benefits? The Role of Corporate Finance

40 Pages Posted: 4 Feb 2013 Last revised: 1 Apr 2013

Sara B. Holland

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Christina Marsh Dalton

Wake Forest University; University of Georgia - Terry College of Business - Department of Economics

Date Written: March 5, 2013

Abstract

When a firm offers health benefits to workers, it exposes the firm to the risk of making payments when workers get sick. A firm can either pay health expenses out of its general assets, keeping the risk inside the firm, or it can purchase insurance, shifting the risk outside the firm. We analyze the firm's decision to manage this risk. Using data on the insurance decisions of publicly-traded firms, we find that smaller firms, firms with more investment opportunities, and firms that face a convex tax schedule are more likely to hedge the risk of health benefit payments. These financial characteristics explain more of the hedging decision relative to commonly-cited state insurance mandates. We also show that hedging health risk mitigates investment-cash flow sensitivities.

Keywords: self-insured, self-fund, hedging, human capital risk, labor risk, health insurance risk, investment cash flow

JEL Classification: G3, I13

Suggested Citation

Holland, Sara B. and Dalton, Christina Marsh, Why Do Firms Use Insurance to Fund Worker Health Benefits? The Role of Corporate Finance (March 5, 2013). Available at SSRN: https://ssrn.com/abstract=2211796 or http://dx.doi.org/10.2139/ssrn.2211796

Sara B. Holland

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

Christina Marsh Dalton (Contact Author)

Wake Forest University ( email )

Winston-Salem, NC 27109
United States

HOME PAGE: http://users.wfu.edu/daltonc

University of Georgia - Terry College of Business - Department of Economics ( email )

Brooks Hall
310 Herty Drive
Athens, GA 30602-6269
United States

HOME PAGE: http://people.terry.uga.edu/clmarsh

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