The Reallocation of Compensation in Response to Health Insurance Premium Increases

This paper examines how compensation packages change when health insurance premiums rise. We use data on employee choices within a single large firm with a flexible benefits plan; an increasingly common arrangement among medium and large firms. In these companies, employees explicitly choose how to allocate compensation between cash and various benefits such as retirement, medical insurance, life insurance, and dental benefits. We find that a $1 increase in the price of health insurance leads to 52-cent increase in expenditures on health insurance. Approximately 2/3 of this increase is financed through reduced wages and 1/3 through other benefits