Duke 2008 | ASHE | Equity and Efficiency in Health and Healthcare

Workers employed at small firms are substantially less likely to be offered health insurance than workers in larger firms. Yet there may be an even more fundamental issue since wages are lower at small firms and these workers are also less likely to be offered most other fringe benefits relative to workers at larger firms. It is therefore important to consider health insurance in the broader context of benefits offered by small firms. Using the 1997-2003 Medical Expenditure Panel Survey and a difference-in-difference methodology, we provide comparisons among health insurance, retirement plans, and paid vacation to help to identify what drives the disparities in health insurance by firm size, focusing attention on administrative costs, worker demand, and insurance market failures. We find evidence that the differences in offer rates in benefits persists even when we control for wages and household income. We also find evidence that the offer gap between workers at smaller and larger firms is at least as large for retirement plans as for health insurance. Moreover, we find gaps – though somewhat smaller – in the offer rates of paid vacations between workers at smaller and larger firms. These findings, taken together, suggest that of the three aforementioned reasons, per worker administrative costs are the most significant driver of the disparities in the offer rates of health insurance across firm size.