How elastic is the firm's demand for health insurance?

We investigate the impact of tax subsidies on the firm's decision to offer insurance, and on conditional firm spending on insurance. We do so using the micro-data underlying the Employment Cost Index, which has a major advantage for this exercise: the matching of very high quality compensation data with information on a sample of workers in the firm. We find that, overall, there is a moderately sized elasticity of insurance offering with respect to after-tax prices (-0.25), and a larger elasticity of insurance spending (-0.7). We also find that the elasticities are driven primarily by small firms, for whom the elasticity is larger. And we find that there is significant value added to this employer-based data: replicating methods from standard micro-data sources in our data lead to misleading estimates of these key parameters. Our simulation results suggest that major tax reform could lead to an enormous reduction in employer-provided health insurance spending. (C) 2003 Elsevier B.V. All rights reserved.