Media Releases

U.S. firms lowball earnings to avoid higher health insurance costs: Rotman School study

February 9, 2015

TORONTO, ON – Amer­i­can com­pa­nies tend to report low­er prof­its when deal­ing with mono­lith­ic health insur­ance providers, a new study shows.

The find­ing under­scores pre­vi­ous research sug­gest­ing the U.S. health insur­ance mar­ket is not as com­pet­i­tive as it could be because cor­po­rate cus­tomers who show ris­ing prof­its are sub­se­quent­ly hit with high­er health ben­e­fit pre­mi­ums.

Giv­en that those pre­mi­ums can rep­re­sent close to one third of U.S. com­pa­nies’ net incomes, “it’s a non-triv­ial eco­nom­ic issue,” says Ole-Kris­t­ian Hope, Deloitte Pro­fes­sor of Account­ing at the Uni­ver­si­ty of Toron­to’s Rot­man School of Man­age­ment. He co-wrote the study with Prof.  Francesco Bova of the Rot­man School and Prof. Yiwei Dou of New York Uni­ver­si­ty, who is a grad­u­ate of the Rot­man PhD pro­gram.

The researchers looked at fed­er­al dis­clo­sure data on ben­e­fit plans from a large sam­ple of ful­ly-insured U.S. firms between 1999 and 2011.

They found a high­er use of dis­cre­tionary account­ing prac­tices, such as write-downs, among com­pa­nies deal­ing with health insur­ers that enjoyed strong bar­gain­ing pow­er. The effect was high­est among com­pa­nies with labour- inten­sive busi­ness­es and with low employ­ee turnover. Merg­ers between health insur­ers were espe­cial­ly like­ly to lead to down­ward earn­ings report­ing.

A 1999 merg­er between Pru­den­tial and Aet­na was fol­lowed by down­ward earn­ings report­ing among cor­po­rate cus­tomers in six states. The excep­tion was Texas, which forced Aet­na to give up some of its busi­ness to com­peti­tors as part of the merg­er.

But did the down­ward trend on earn­ings reports actu­al­ly work to reduce sub­se­quent health­care insur­ance costs? The study found pre­lim­i­nary evi­dence that it did. And that, say the researchers, has its own down­side, poten­tial­ly hurt­ing such things as stock price, account­ing qual­i­ty and the cost of cap­i­tal.

The U.S. health­care sys­tem is large­ly under­pinned by pri­vate insur­ance. Pre­mi­ums for pri­vate health insur­ance were $917 bil­lion in 2012.  This is the first time that health insur­ers’ influ­ence on cor­po­rate finan­cial report­ing has been stud­ied.

The com­plete study is avail­able at:

For the lat­est think­ing on busi­ness, man­age­ment and eco­nom­ics from the Rot­man School of Man­age­ment, vis­it

The Rot­man School of Man­age­ment is locat­ed in the heart of Canada’s com­mer­cial and cul­tur­al cap­i­tal and is part of the Uni­ver­si­ty of Toron­to, one of the world’s top 20 research uni­ver­si­ties. The Rot­man School fos­ters a new way to think that enables our grad­u­ates to tack­le today’s glob­al busi­ness chal­lenges.  For more infor­ma­tion, vis­it


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Ken McGuf­fin
Man­ag­er, Media Rela­tions
Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
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