Uninsured CONFERENCE DRAFT Dynamic Inefficiencies in Employment - Based Health Insurance System

We investigate how U.S. employment-based health insurance system a¤ects health care decisions. We stress that health is a form of human capital that a¤ects productivity on the job and we suggest that the current U.S. system might lead to an ine¢ cient low level of individual health due to employees’turnover. Turnover in frictional labor markets creates an externality that limits employer’and employee’s ability to privately capture the full bene…ts of health investments. Moreover, we show that under-investment in health is positively related to the turnover rate of the workers’industry and increases medical expenditure in retirement. We provide empirical evidence for the predictions of the model using two data sets, the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS). In MEPS, we …nd that employers in industries with high turnover rates are much less likely to o¤er health insurance to their workers. When employers o¤er health insurance, the contracts have higher deductibles and employers’contribution to the insurance premium is lower in high turnover industries. Moreover, workers in high turnover industries have lower medical expenditure and undertake less preventive care. In HRS, instead we …nd that individuals who were employed in high turnover industries have higher medical expenditure when retired. We also evaluate and cast doubt on alternative explanations. JEL Classi…cation Numbers: D84, D91, I12