Effects of Rising Health Insurance Premiums

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Every 10 percent increase in health insurance costs reduces the chances of being employed by 1.6 percent. It also reduces hours worked by 1 percent.
Two-thirds of a premium increase is paid for with wages and the remaining third from a reduction in benefits.

In an indication of why the cause of health care reform is attracting a broader constituency, two new NBER studies offer evidence that soaring health insurance premiums do more than swell the ranks of the uninsured. They boost unemployment, push more workers into part-time jobs, and force employees to sacrifice wages and other benefits just to retain some measure of coverage.

In The Labor Market Effects of Rising Health Insurance Premiums (NBER Working Paper No. 11160), NBER associates Katherine Baicker and Amitabh Chandra note that premiums for employer-provided health insurance have risen 59 percent since 2000, far outstripping wage gains. For example, between 2003 and 2004 alone, premiums went up by 11.2 percent while wages increased only 2.3 percent.

Their analysis reveals that these increases are taking a heavy toll on workers. Every 10 percent increase in health insurance costs reduces the chances of being employed by 1.6 percent. It also reduces hours worked by 1 percent as employers respond to rising health costs by converting full-time jobs to part-time positions, most of which do not include health benefits. For workers who continue to get health insurance, more and more often, the increased price of premiums is coming out of their salary: a 10 percent increase in premiums is offset by a 2.3 percent decrease in wages.

Particularly vulnerable, the authors observe, are low-wage hourly workers, because employers are legally constrained from how much they can reduce wages to accommodate a rise in health premiums. So, instead they may choose to just drop coverage altogether. Baicker and Chandra report that "workers who are paid hourly with a wage of less than $8 an hour are significantly more likely to lose health insurance as premiums rise." For hourly workers, "a ten percent increase in health insurance premiums results in a 3.8 percent reduction in the probability of being offered health insurance coverage."

Baicker and Chandra also note that married, healthy women are more likely to lose their employer-provided insurance when premiums go up, but for different reasons. Because they either can get coverage through their husband's plan or because they don't use health services frequently, the women may decide the higher premiums aren't worth it.

Overall, Baicker and Chandra believe "it is possible that a significant portion of the increase in the uninsured population may be a consequence of employers shedding this benefit as health insurance premiums rise." They point out that a 34 percent rise in premiums during the 1990s is probably the reason why, despite strong economic growth in the decade, the number of uninsured grew 3 percentage points to 15.7 percent of the population.

In Wage and Benefit Changes in Response to Rising Health Insurance Costs (NBER Working Paper No. 11063), co-authors Dana Goldman, Neeraj Sood, and Arleen Leibowitz offer further evidence of the far-reaching effects of health insurance inflation. They show that rising health costs are forcing many employees who want to retain coverage to surrender both income and benefits.

These authors examined the response to health insurance costs among almost 3000 employees at a single large firm. Like a growing number of workers today, these employees are offered what are known as "defined-contribution benefit plans." Such plans offer a base amount of coverage for a variety of areas, such as health, life insurance, disability, and retirement. If employees want additional coverage in any area, they can either pay for it outright from their pre-tax earnings or reduce benefits in one area and shift them to another.

During the three-year period of the study, premiums for the basic health plan offered to employees -- which covered only catastrophic care -- stayed the same, while costs for other plans went up. That left employees facing a decision: to maintain their existing level of coverage, they had to accept either a salary cut or a reduction in other benefits. Goldman, Sood, and Leibowitz find that in these situations, two-thirds of a premium increase is paid for with wages and the remaining third from a reduction in benefits. In other instances, employees simply shifted to less generous plans, such as one that only covered catastrophic illness.

In both studies, the researchers see their results as having serious societal implications. Baicker and Chandra believe it is particularly important that any effort to cover the uninsured take into account their finding that many employers are not going to single-handedly absorb price increases in health insurance. For example, if there is a government mandate to provide coverage, their study indicates that employers will either require employees to pay for at least a portion of the increase or shift more staffing to part-time positions that are often exempt from such mandates, thus undermining the policy. "More generally, rising health insurance premiums will place an increasing burden on workers and increase the ranks of the uninsured and the unemployed," they conclude.

Goldman, Sood, and Leibowitz warn that rising health insurance costs are not only reducing take-home pay -- and hence consumer spending -- they also are "lowering insurance purchases against a variety of other risks."

"If health insurance purchases continue to rise and individuals continue to reduce their purchase of health insurance and other insurance products, that might leave them more vulnerable to health, mortality, disability and other significant risks in the long-run," they writ

-- Matthew Davis