The Selection Effects of Tied Health Insurance Contracts

Employers typically offer one of two types of health plans: tied contracts (coverage ends at retirement) or retiree contracts (coverage continues in retirement). In comparison to a retiree plan, a tied contract provides an obvious incentive to delay retirement, but which workers stay? Some papers suggest that the sickest workers are most likely to stay, because they presumably attach the highest value to health insurance. It seems odd, however, that a firm would voluntarily institute a contract that delivers such adverse selection. Tied contracts produce advantageous selection. That is, firms that use tied contracts are successful not only in increasing their retention rate, but also in improving the health composition of their older workforce. Additionally, tied contracts are consistently found to delay retirement even after age 65, at which point workers are eligible for Medicare coverage. This “excess retention” effect is driven by the fact that Medicare does not cover dependents. These results point to rational decision making by firms and workers, but also raise questions about why firms offer one contract over the other.

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