Our new insight is on the interaction between relative labor turnover dynamics and lack of insurers’ premium flexibility. A related possibility is that high labor turnover may be preferred by some employers, especially small firms that employ homogenous workers with low job-specific human capital. Workers tolerant of high turnover tend to be younger and healthier. By not offering health insurance, despite the tax advantage, these firms deter older and less healthy workers. High administrative costs of offering health insurance in small firms further exacerbate this dynamic selection problem. Our model provides an explanation for the well-documented pattern that small firms are much more likely to forgo health.
