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

Abstract

We investigate the impact of tax subsidies on the firms decision to offer insurance, and on conditional firm spending on insurance. We do so using the micro-data underlying the Employee Compensation Index, which has a major advantage for this exercise: the matching of very high quality compensation data with information on a sample of workers in the firm. We find that, overall, there is a modest elasticity of insurance offering with respect to after-tax prices (elasticity of -0.31 to -0.41), but a larger elasticity of insurance spending (elasticity of 0.66 to 0.99). We also find that the elasticity of offering is driven solely by small firms, for whom the elasticity is much larger, but that spending is more elastic in large firms. We provide some evidence on how the aggregation of worker preferences determines benefits provision decisions. In particular, we find evidence to support a median voter model of benefits determination, along with some additional influence for the most highly compensated workers in the firm. Our simulation results suggest that major tax reform could lead to an enormous reduction in employer-provided health insurance spending.