Reference no: EM132960049

Question - You are a new manager of a medium-size firm which currently offers health insurance to its workers (it is part of the benefits package so there is no opting-in or out). Under the current package, the firm pays 50% of all healthcare expenses. Last year, the firm paid out $450,000 in reimbursements and the workers (collectively) paid out $450,000 (for a total bill of $900,000).

Now, suppose that the economy is booming. To stay competitive, you are considering two options to keep and attract workers to your firm: (1) an across-the-board pay raise, or (2) a more generous insurance plan where you now cover 80% of all expenses (your workers are left paying the residual 20%). You are considering these options because some of your competitors are offering higher wages while others are offering a more generous health insurance plan.

a. Describe what you anticipate to happen to the labor pool (i.e., the set of workers that you manage to retain and attract) if you were to opt for (1) and (2), respectively?

b. What can you expect to happen to your healthcare expenses if you were to opt for (1) and (2), respectively?