Reducing Employer Health Care Expense: A Look at Transaction Costs

Almost all firms have taken measures to reduce the employee health claim cost component of health care expense. Many large firms have also been able to reduce the transaction costs of health insurance by changing to partial or full self‐insurance. For smaller firms the self‐insurance decision involves careful weighing of cash flow and tax considerations against risk consequences. This paper analyzes the risk trade offs inherent in the self‐insurance decision. A case study illustrates how cash flow and tax considerations affect the cost of partial and full self‐insurance for a medium size firm.