Who really pays for health insurance? The incidence of employer-provided health insurance with sticky nominal wages

This paper addresses two seeming paradoxes in the realm of employer-provided health insurance: First, businesses consistently claim that they bear the burden of the insurance they provide for employees, despite theory and empirical evidence indicating that workers bear the full incidence. Second, benefit generosity and the percentage of premiums paid by employers have decreased in recent decades, despite the preferential tax treatment of employer-paid benefits relative to wages - trends unexplained by the standard incidence model. This paper offers a revised incidence model based on nominal wage rigidity, in an attempt to explain these paradoxes. The model predicts that when the nominal wage constraint binds, some of the burden of increasing insurance premiums will fall on firms, particularly small companies with low-wage employees. In response, firms will reduce employment, decrease benefit generosity, and require larger employee premium contributions. Using Current Population Survey data from 2000-2001, I find evidence for this kind of wage rigidity and its associated impact on the employment and premium contributions of low-wage insured workers during a period of rapid premium growth. © 2005 Springer Science+Business Media, Inc.