Health Capital and Finance

In corporate finance, we study the investment decisions of firms. Most of the time we focus on investments in physical capital, but firms also invest in human capital. A major component of human capital is health capital, and firms already spend a large amount of money on the health of their employees. In 2005, for example, employers in the United States spent more than $500 billion on group health insurance, which firms use to invest in their workers' health capital. Corporate finance has not yet analyzed health expenditures as an investment. This research on health and human capital complements the corporate finance literature on investment in physical capital. Additionally, the results have important welfare implications, which may aid policymakers.In the first chapter, I show how a firm's health capital investment depends on each employee's human capital, labor productivity, and firm size. Firms mitigate depreciation in a worker's human capital by investing in health to increase the productivity of human and physical capital. Results indicate that firms that have higher labor productivity, are larger, and spend more on research and development invest more in health capital. I estimate the subsequent effect of health capital investment on value using firm-level data on health insurance premiums. To identify the effect, I instrument for health insurance premiums with a time series of state health insurance mandates, state birth rates, and the number of persons covered by health insurance contracts. The marginal effect of health capital investment on firm value is zero, suggesting that firms are in equilibrium with respect to health capital investment. Market to book reflects the value of this investment because health capital is an intangible asset that the book value of assets does not capture. These results have implications for policymakers who target the employer-based system of health insurance provision as both a means of extending coverage and managing utilization.In the second chapter, I present a model of the health capital investment decision of a firm using a moral hazard framework. Health capital investment increases the probability that a worker is present and productive. The firm cannot verify a worker's health capital investment decision. When a firm invests in health capital, the investment is verifiable because the firm contracts with the insurer. I derive the optimal contract for when the worker and for when the firm invests in health capital. When the firm invests in health capital, the level of investment is higher, wages are less volatile, and wages are higher relative to when the worker invests in health capital. I discuss the welfare implications. In my model, firms invest more than workers because of a production externality and because it is less costly to invest in health capital than to compensate the worker for bearing the risk of an uncertain labor realization. This result improves welfare, contrary to the benchmark that workers consume more health care than is efficient ex post when firms provide health insurance. Unlike the benchmark model of a worker and insurer, my model includes a profit maximizing firm, includes an endogenous probability of getting sick, and allows the insurer to set premiums by anticipating the health care investment level of the insured.In the third chapter, I discuss how firms hedge risky human capital with health benefit plans. Firms can choose to fully hedge by contracting with an insurance company, remain unhedged by funding benefits out of general assets, or partially hedge by using a combination of insurance and the general assets of the firm. I adapt the model of Froot, Scharfstein, and Stein (1993) to explore the firm's hedging decision. Consistent with the predictions of the model, firms that find external finance costly and that face a convex tax schedule are more likely to hedge. Additionally, the effect of cash flow on investment is lower for firms that partially hedge human capital risk