Health Care Costs and Corporate Investment

Abstract

Health care costs for U.S. employers have tripled in the past twenty years. By constructing a novel dataset of firm-specific health care expenses, I show that firms negatively adjust both capital expenditures and R&D expenses in response to changes in health care costs. I estimate that, on average, a 1% increase in health care costs is associated with a 0.7% decrease in total investment. The effects are greater for financially constrained firms, firms employing more high-skilled workers, and firms working with fewer insurers. Additional tests confirm that hiring fewer workers and reducing wages do not offset rising health costs enough to counteract this lower investment channel. Overall, my findings suggest that increasing health care costs limit firms’ ability to expand physically or through innovation.