With health care spending rising at a significantly faster rate than the growth ofgross domestic product (GDP), business revenues, and wages, it has become widely recognized that health care costs are a drag on economic growth. Reforms that bring the rate of health spending growth in line with inflation and improve the value, quality, and efficiency of care are essential to restoring and sustaining robust growth inthe U.S. economy.
Rising Health Care Costs Diminish Household Income and Consumption
Increasing health care costs have reduced or stagnated wages for American workers in the past decade as dollars that would have gone into wage increases have instead gone to pay the increased cost of health insurance. In 1999, the average employer contributed $4,200 toward premiums for a family health insurance policy. By 2008, the contribution had risen to $9,300. Because wages,health insurance, and other fringe benefits are all components of overall worker compensation, the massive increases in health insurance premiums have sapped wage increases. Since 1999, average wages have only risen 29% while health insurance premiums have grown a whopping 120%.2 A recent article in the Journal of the American Medical Association argued that the “health care cost-wage trade-off” has resulted in relatively flat wages for 30 years.1
Not only are rising health care costs resulting in lower paychecks for American workers, they are eating up more of their family budgets. In 1999, the average American family contributed $1,500 toward their health insurance premiums. By 2008, the amount more than doubled to $3,400. After paying premiums, families can pay up to $1,3002 for deductibles and co-pays. Health care costs are therefore responsible for significantly reducing the disposable income families have to spend on other goods and services.
Reducing the annual increases in health care costs will mean more money in the pockets of American families.
Rising Health Costs Diminish Job Creation and Business Investment
Despite employers’ ability to shift some of the cost of increasing health insurance to employees through lower wages and consumers through higher prices,American employers are significantly affected by the rising cost of health care. The steep relative growth in health insurance costs diminishes the funds available for investment in productivity-increasing new capital, expansion of output, and creation of new jobs.
A 2006 survey of major corporate CEOs by the Business Council and The Conference Board found that healthcare costs were a major obstacle to hiring, with 86%of CEOs surveyed calling the issue either very important or the most important challenge facing policy makers.3
One study found that a 10% increase in health insurance premiums reduces the aggregate probability of being employed by 1.2 percentage points, reduces hours worked by 2.4 percent, and increases the likelihood that a worker is employed only part-time by 1.9 percentage points.4
The rising cost of U.S. health care puts American firms at a competitive disadvantage in the global marketplace where foreign competitors do not carry the cost of health benefits for their employees. U.S. manufacturers pay $2.38 an hour for health benefits, while manufacturers among America’s major trading partnerspay only $0.96 an hour on average.5 As an example of the price pressure created by health care, General Motors reported that $1,500 per car made in the United States is attributable to health care. It is significantly cheaper to produce goods in Canada where health care as a percentage of payroll is only 4.5% compared to 13% in the U.S.6 This creates a major incentive for U.S. employers to expand production abroad, but not at home.
Health Cost Effect on State Government Spending
Medicaid is the second largest line item in state budgets, following elementary and secondary education. Medicaid, like private insurance and Medicare, is facing skyrocketing cost increases. According to a report released by the Centers for Medicare and Medicaid Services, Medicaid spending will significantly outpace the growth of the U.S. economy during the next 10 years. Medicaid benefit expenditures were projected to reach $339 billion in 2008 up from $332 billion in 2007, and reach $673 billion by 2017.7
At the same time the costs per beneficiary are increasing, the downturn in the economy has forced more families to turnto Medicaid for health coverage. Congress and the Obama Administration recently allocated $15 billion in additional funds to Medicaid and SCHIP. Even so, growing enrollments add to the severity of strains on state budgets resulting from declining tax revenues accompanying the contracting economy at a time when the costs of Medicaid continue to climb steeply. In a recent survey by the Kaiser Family Foundation, two thirds of state Medicaid directors say that there is at least a 50-50 chance that they will face a shortfall in their Medicaid budgets during the current year.8 These shortfalls could result in benefit cuts or changes in eligibility for the program.
As states attempt to maintain Medicaid benefits and coverage, their ability to invest in areas that create jobs and improve future economic prospects, such as education and infrastructure are diminished. A study in 2003 estimated that each new dollar in Medicaid spending means 6 to 7 cents less spending in higher education.
Reform that can slow the growth in Medicaid costs while maintaining or improving quality of care is essential to states being able to maintain health care access for families across America.
Given the impact of rising health care costs on household, business, and state spending, as well as the competitive disadvantage these costs create for American businesses operating in a global marketplace, health care reform emerges as a critically important component of an economic strategy to restore robust growth and job creation to the US economy.