Where Do the Sick Go? Health Insurance and Employment in Small and Large Firms

Small firms that offer health insurance to their employees may face variable premiums if the firm hires an employee with high‐expected health costs. To avoid expensive premium variability, a small firm may attempt to maintain a workforce with low‐expected health costs. In addition, workers with high‐expected health costs may prefer employment in larger firms with health insurance rather than in smaller firms. This results in employment distortions. We examine the magnitude of these employment distortions in hiring, employment, and separations using the Medical Expenditure Panel Survey from 1996 to 2001. We find that workers with high‐expected health costs are less likely to be new hires in insured small firms and are less likely to be employed in insured small firms. We find no evidence that state small group health insurance reforms designed to restrict insurers' ability to deny coverage and restrict premium variability have reduced the extent of these distortions.