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Who Really Pays for Health Insurance? The Incidence of Employer-Provided Health Insurance with Sticky Nominal Wages

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  • Benjamin Sommers

Abstract

This paper addresses two seeming paradoxes in the realm of employer-provided health insurance: First, businesses consistently claim that they bear the burden of the insurance they provide for employees, despite theory and empirical evidence indicating that workers bear the full incidence. Second, benefit generosity and the percentage of premiums paid by employers have decreased in recent decades, despite the preferential tax treatment of employer-paid benefits relative to wages—trends unexplained by the standard incidence model. This paper offers a revised incidence model based on nominal wage rigidity, in an attempt to explain these paradoxes. The model predicts that when the nominal wage constraint binds, some of the burden of increasing insurance premiums will fall on firms, particularly small companies with low-wage employees. In response, firms will reduce employment, decrease benefit generosity, and require larger employee premium contributions. Using Current Population Survey data from 2000–2001, I find evidence for this kind of wage rigidity and its associated impact on the employment and premium contributions of low-wage insured workers during a period of rapid premium growth. Copyright Springer Science+Business Media, Inc. 2005

Suggested Citation

  • Benjamin Sommers, 2005. "Who Really Pays for Health Insurance? The Incidence of Employer-Provided Health Insurance with Sticky Nominal Wages," International Journal of Health Economics and Management, Springer, vol. 5(1), pages 89-118, January.
    • Handle: RePEc:kap:ijhcfe:v:5:y:2005:i:1:p:89-118
    DOI: 10.1007/s10754-005-6603-5
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    Cited by:

    1. Sommers, Benjamin D. & Oellerich, Donald, 2013. "The poverty-reducing effect of Medicaid," Journal of Health Economics, Elsevier, vol. 32(5), pages 816-832.
    2. Xuguang Guo & Ran Tao, 2015. "Health Benefit Downward Rigidity: Employers’ Responses to Rising Insurance Costs," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 18(2), pages 217-241, September.
    3. Kosteas, Vasilios D. & Renna, Francesco, 2014. "Plan choice, health insurance cost and premium sharing," Journal of Health Economics, Elsevier, vol. 35(C), pages 179-188.
    4. Youjin Hahn & Myungkyu Shim & Hee-Seung Yang, 2021. "Industry Variations in Health Plans and Dynamic Employment Substitution," Journal of Labor Research, Springer, vol. 42(3), pages 449-467, December.
    5. Meiselbach, Mark K. & Abraham, Jean M., 2023. "Do minimum wage laws affect employer-sponsored insurance provision?," Journal of Health Economics, Elsevier, vol. 92(C).
    6. Jeske, Karsten & Kitao, Sagiri, 2009. "U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 210-221, March.
    7. C. J. Krizan & Adela Luque & Alice Zawacki, 2014. "The Effect Of Employer Health Insurance Offering On The Growth And Survival Of Small Business Prior To The Affordable Care Act," Working Papers 14-22, Center for Economic Studies, U.S. Census Bureau.
    8. Jessica Vistnes & Michael Morrisey & Gail Jensen, 2006. "Employer choices of family premium sharing," International Journal of Health Economics and Management, Springer, vol. 6(1), pages 25-47, March.
    9. Priyanka Anand, 2017. "Health Insurance Costs and Employee Compensation: Evidence from the National Compensation Survey," Health Economics, John Wiley & Sons, Ltd., vol. 26(12), pages 1601-1616, December.
    10. Stuart H. Altman, 2005. "Will the United States continue to allocate a growing proportion of its GDP to health care?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 50(Jun), pages 231-263.

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