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Is Health Insurance Making Your Firm Sick?​

November 3, 2016

Since World War II, employers have been the primary providers of health insurance to U.S. workers. The belief that employers should offer health insurance as part of their benefit packages is now so universal that public opinion of many large companies has been swayed heavily by their benefit practices. For example, Wal-Mart, the largest retailer in the world, has been vilified in the media for not providing health insurance to its employees. Facebook, Starbucks, and Twitter, by contrast, all have been applauded for their efforts to bolster their employee benefits offerings.

New research out of Olin Business School at Washington University in St. Louis sheds light on the relationship between employee benefits and the profitability and competitiveness of small businesses.

Just as widespread is the view that employee benefits are a good investment for companies. The reasoning is that by providing employee benefits, a company demonstrates its stability and commitment to its workforce. In return, the view holds, employees will show greater commitment to the company, will exhibit higher motivation, and will be more productive.

But providing such benefits — health insurance in particular — is typically very costly, especially for small firms. Small firms generally pay more for health insurance per employee than larger firms because they have fewer employees and therefore smaller risk pools. Is the payoff for a small firm worth this investment? How do small businesses that provide health insurance fare compared to their counterparts that do not?

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The researchers reviewed data on some 15,000 firms over the 2004−2010 time period—before implementation of the Patient Protection and Affordable Care Act—to compare the labor productivity, employee turnover, profitability, stability, and growth rate of companies that voluntarily offered their employees health insurance and those that did not.

Prof. Ulya Tsolmon presented “Will Mandatory Health Benefits Make Companies Sick?” on November 11, 2016.

One key finding was that following the economic crisis of 2007, firms that did not offer health insurance lowered employee wages by an average of 25 percent; by contrast, the average wages in firms offering health insurance declined only 5 percent during the same period. Further, firms that did not provide their employees with health insurance laid off a larger percentage of their workforce during the Great Recession than did firms providing health insurance.

In comparison, the group of firms providing health insurance had a much lower employee turnover rate, higher profitability, and higher sales per employee. However, the average growth rate of the group that provided health insurance was lower when compared to the group not providing health insurance.

The cause of this discrepancy?

The study results seem to indicate that firms with health insurance enter into an implicit contract with their employees: The firm shields employees from economic downturns but asks them to exert effort and commitment to increase the firm’s performance. However, according to lead researcher Ulya Tsolmon, “firms with health insurance seem to be more cautious than those without health insurance when expanding, as making and keeping commitments to employees is not an easy task, especially during economic downturns.”

KEY TAKEAWAYS for Managers

  1. Managers in small businesses that are considering expanding employee benefits to include health insurance should rely on hard data to evaluate the effect of the offering on employee turnover, productivity, and company growth.
  2. The provision of benefits might not be a one-size-fits-all approach as firms that provide health insurance experience slower growth rates but also experience improved metrics in many other areas.

This study offers important insights for policymakers—especially with the Patient Protection and Affordable Care Act, including the question of whether to expand the employer mandate on health insurance to businesses of all sizes, likely to return to the congressional agenda early in 2017. Inasmuch as 99 percent of all US companies are small businesses that together employ more than 50 percent of US workers, expanding the mandate to require these firms to offer health insurance clearly has the potential to dramatically increase the number of insured Americans. But any such discussion, the researchers note, should include consideration of how a broadened mandate might affect the growth of these small businesses.

“Health Insurance and Relational Contracts in Small American Firms”

Authors:

Ulya Tsolmon, Assistant Professor of Strategy, Olin Business School, Washington University in St. Louis

Dan Ariely and Sharon Belenzon, Duke University, The Fuqua School of Business

under review R&R at Strategic Management Journal

View the research presentation