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

Dalton, Christina Marsh and Holland, Sara B. (2015): Why Do Firms Use Insurance to Fund Worker Health Benefits? The Role of Corporate Finance.

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. Health risk is common to all firms, making this application an important contribution to understanding firms’ hedging decisions. Additionally, we reveal new and important determinants of the hedging decision relative to regulatory regimes. We also show that hedging health risk mitigates investment-cash flow sensitivities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Self-insure, self-fund, hedging, human capital risk, health insurance risk, investment
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance; I - Health, Education, and Welfare > I1 - Health > I13 - Health Insurance, Public and Private

References

Acs, G., S. H. Long, M. S. Marquis, and P. F. Short (1996). Self-insured employer health plans: Prevalence, profile, provisions, and premiums. Health Affiars 15 (2).

Agency for Healthcare Research and Quality (2005). edical expenditure panel survey - insurance component. Technical report, Center for Financing, Access and Cost Trends.

Aunon-Nerin, D. and P. Ehling (2008). Why firms purchase property insurance. Journal of Financial Economics 90, 298–312.

Congdon, W. J., A. K. and M. H. Showalter (2008). State health insurance regulations and the price of high-deductible policies. Forum for Health Economics and Policy 11 (2), 1–24.

DeMarzo, P. and D. Duffie (1995). Corporate incentives for hedging and hedge accounting. Review of Financial Studies 8, 743–771.

Department of Health and Human Services (1997, March 20). Establishing an analytical framework for measuring the role of reinsurance in the health insurance market. Technical report, Office of the Assistant Secretary for Planning and Evaluation. Prepared by The Lewin Group.

Deshmukh, S. and S. Vogt (2005). Investment, cash flow, and corporate hedging. Journal of Corporate Finance 11, 628–644.

Fazzari, S., G. Hubbard, and B. Peterson (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity 1, 141–206.

Feldman, R. (2012). Why do employers self-insure? New explanations for the choice of self-insurance vs. purchased health insurance. Geneva Papers 37, 696–711.

Froot, K., D. Scharfstein, and J. Stein (1993). Risk management: Coordinating corporate investment and financing policies. Journal of Finance 48, 1629–1648.

Gabel, J. R. and G. A. Jensen (1989). The price of state mandated benefits. Inquiry 26 (4), 419–431.

Garfinkel, S. A. (1995). Self-insuring employee health benefits. Medical Care Research and Review 52 (4), 475–91.

Gruber, J. (1994, November). State mandated benefits and employer-provided health insurance. Journal of Public Economics 55.

Guay, W. and S. Kothari (2003). How much do firms hedge with derivatives? Journal of Financial Economics 70, 423–461.

Intrator, O., D. C. Grabowski, J. Zinn, M. Schleinitz, Z. Feng, S. Miller, and V. Mor (2007). Hospitalization of nursing home residents: The effects of states’ Medicaid payment and bed-hold policies. Health Services Research 42, 1651–1671.

Jensen, G., K. Cotter, and M. Morrisey (1995). State insurance regulation and employers’ decisions to self-insure. Journal of Risk and Insurance 62, 185–213.

Jensen, G. A. and M. A. Morrisey (1990). Group health insurance: a hedonic price approach. The Review of Economics and Statistics 72, 38–44.

Jin, Y. and P. Jorion (2006). Firm value and hedging: Evidence from U.S. oil and gas producers. Journal of Finance 61, 893–919.

Kaiser Family Foundation (2012). Employer Health Benefits Annual Survey.

Kaplan, S. and L. Zingales (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics 112, 169–215.

Lamont, O. (1997). Cash flow and investment: Evidence from internal capital markets. Journal of Finance 52, 83–111.

LaPierre, T. A., C. J. Conover, J. W. Henderson, A. J. Seward, and B. A. Taylor (2009). Estimating the impact of state health insurance mandates on premium costs in the individual market. Journal of Insurance Regulation 27 (3), 3–36.

Marquis, S. M. and S. H. Long (1999). Recent trends in self-insured employer health plans. Health Affairs 18 (3), 161–67.

Nance, D., C. Smith, and C. Smithson (1993). On the determinants of corporate hedging. Journal of Finance 48, 267–284.

Neal, D. (1995). Industry-specific human capital: Evidence from displaced workers. Journal of Labor Economics 13 (4), 653–677.

Parente, S., R. Feldman, J. Abraham, and Y. Xu (2001). Consumer response to a national marketplace for individual health insurance. Journal of Risk and Insurance 78 (2), 389–411.

Park, C. (2000). Prevalence of employer self-insured health benefits: National and state variation. Medical Care Research and Review 57 (3).

Pear, R. (2013, Febrary 17). Some employers could opt out of insurance market, raising others’ costs. New York Times.

Rampini, A., A. Sufi, and S. Vishuanathan (2014). Dynamic risk management. Journal of Financial Economics 111, 271–296.

Rauh, J. (2006). Investment and financing constraings: Evidence from the funding of corporate pension plans. Journal of Finance 61, 33–71.

Simon, K. (2005). Adverse selection in health insurance markets? Evidence from state small-group health insurance reforms. Journal of Public Economics 89 (9-10), 1865–1877.

Smith, C. and R. Stulz (1985). The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis 20, 391–405.

Stulz, R. (1984). Optimal hedging policies. Journal of Financial Economics 26, 127–140.

Tufano, P. (1996). Who manages risk? An empirical xamination of risk-management practices in the gold mining industry. Journal of Finance 51, 1097–1137.

Vickery, J. (2008). How and why do small firms manage interest rate risk? Journal of Financial Economics 87, 446–470.

Warner, J. (1977). Bankruptcy costs: Some evidence. Journal of Finance 32, 337–348. Weaver, C. and A. Mathews (2013, May 27). One strategy for health-law costs: Self-insure. Wall Street Journal.