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Author: Ellis, Randall P. ; Ma, Albert C. T.
Working Paper: Health Insurance, Expectations, and Job Turnover (PDF) ; July 2004

It is well established that small firms are less likely to offer health insurance to their employees than large firms. In this paper, we propose that employers avoid offering health insurance when it is useful as a selection tool for attracting relatively healthy and more profitable employees. This technique is particularly attractive to small firms because of their relatively high variability in expected employee health care costs. We test this hypothesis by developing a theoretical model of employee selection in which all workers are equally productive, and yet some employers may find it unprofitable to offer health insurance because it lowers their overall labor costs. We find that it is not the absolute level of job turnover that matters for the selection problem of interest here, but rather it is the relative turnover rates of high versus low health cost workers. Our analysis provides a rationale for why many firms may decide not to offer insurance, and is the only one to date that explains the striking pattern by firm size.