NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Employer Health Care Costs Are Down

"...the shift to managed care does not appear to be directly responsible for significant cost savings, because average managed care premiums are now almost as high as those for fee-for-service plans."

According to a recent NBER Working Paper by Alan Krueger and Helen Levy, the most widely used measure of employer health care costs -- the health insurance component of the Employment Cost Index (ECI) -- indicates that cost growth has decelerated since 1989. In fact, employer expenditures per hour worked have declined even in nominal (that is, not adjusted for inflation) dollars in recent years.

The ECI measures compensation growth for a fixed set of jobs. It shows that in 1995 the growth rate of nominal health insurance costs dropped below the growth rate of wages and salaries for the first time since 1986. Further, the rate of growth in employer health care costs has been decelerating since the late 1980s: in the last two years, nominal health care expenditures per employee fell from $1.14 per hour in 1994, to $1.06 in 1995, and to $1.04 in 1996.

In Accounting for the Slowdown in Employer Health Care Costs (NBER Working Paper No. 5891), Krueger and Levy analyze the components of changes in employers' health care costs over the 1992-4 and 1987-93 periods. Their data come from a variety of sources, but are only available for the entire workforce for the later period, while they are available only for medium and large firms for 1987-93. They find that employer costs have decreased primarily as a result of a steady decrease in the fraction of workers with coverage and a large decrease in the rate of growth of insurance premiums in both fee-for-service and managed care plans. Declining coverage rates have offset about one-quarter to one-third of the cost increases that otherwise would have been observed as a result of increases in premiums over both time periods, the authors calculate. In addition, some of the reduced growth in employer health care costs represents shifting costs from employers to employees -- the employer paying a smaller share of the worker's premium. This effect is more noticeable for 1987-93 than for 1992-4, Krueger and Levy note. Contrary to conventional wisdom, they conclude that the shift to managed care does not appear to be directly responsible for significant cost savings, because average managed care premiums are now almost as high as those for fee-for-service plans.


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