Valuation effects of health cost containment measures

This study reports the findings of research into the valuation effects of health cost containment activities by publicly traded corporations. The motivation for this study was employers' increasing cost of providing health care insurance to their employees and employers' efforts to contain those costs. A 1990 survey of corporate health benefits indicated that these costs represented 25 percent of employers' net earnings and this would rise by the year 2000 if no actions were taken to reduce cost. Health cost containment programs that are implemented by firms should be seen by shareholders as a wealth maximizing effort. As such, this should be reflected in share price. This study employed standard event study methodology where the event is a media announcement or report regarding an attempt by a firm to contain the costs of providing health insurance and other health related benefits to employees. It examined abnormal returns on a number of event days and for a number of event intervals. Of the daily and interval returns that are least significant at the 10 percent level, virtually all are negative. Cross-sectional analysis shows that the abnormal returns are related negatively to a unionization variable.