Who Pays for Health Insurance? Employee Contributions to Health Insurance Premiums


Most private health insurance in the US is provided as a benefit of employment. One
explanation for this phenomenon is that employer contributions to health insurance premiums are
not taxed as income to the worker. It is somewhat puzzling, then, that a substantial fraction of
workers contribute to their premiums, since these contributions are frequently made out of after-tax
dollars. In this paper l examine the possibility that firms use employee contributions to distinguish
between workers who do and do not want health insurance, in order to compensate them more
efficiently when recruiting additional workers is costly. This model has clear predictions for the
relationship between worker demand for health insurance and (l) the probability that health
insurance is offered; (2) the probability that an employee contribution is required; (3) the
probability that the firm establishes a Flexible Spending Account that allows the employee
contribution to be made pre-tax; and (4) the employee’s share of the premium when a contribution
is required. l test these predictions using data from the 1993 Robert Wood Johnson Foundation
Survey of Employers. Using worker age as a proxy for health insurance demand, I find results that
are generally consistent with the predictions of the model. However, the fraction of workers who
are female, which should also be related to demand for health insurance, does not exhibit a
consistent relationship with health insurance offering and contribution requirements, so that
overall the evidence on this hypothesis is mixed I conclude that while imperfect worker sorting
on the basis of demand for health insurance does not explain all employee contributions, it may
play a significant role in explaining why firms require contributions.

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