Employer-sponsored insurance, health care cost growth, and the economic performance of U.S. Industries.

The rate of growth in health care costs in the United States has outpaced the growth rate in the gross domestic product (GDP) for many years. Correspondingly, the share of GDP accounted for by health care spending increased from 4.5 percent in 1940, to 12.2 percent in 1990, to 16.0 percent in 2005, when health care spending totaled nearly US$2 trillion, or US$6,697 per capita (Catlin et al. 2007). Recently, concern has intensified that continued rapid growth in health care costs, and especially in the share of GDP devoted to health care, may harm the U.S. economy. Private businesses are especially vulnerable to health care cost growth because about three-fifths of all Americans have employer-sponsored health insurance (ESI) (Kaiser Commission on Medicaid and the Uninsured 2007). Many observers argue that rapidly rising health insurance premiums exert pressure on employers to increase total employee compensation, as employers cannot easily reduce wages to completely offset premium increases. For some employers, explicit contracts (e.g., with unions) may preclude wage cuts or even require wage increases. Other employers may be prevented from reducing wages by implicit norms, a desire to avoid damaging working morale, or competition for workers with unionized firms. Upward pressure on total compensation, in turn, may force employers to reduce health benefits, cut employment, and raise prices, which in turn may lead to lower output and profits (Cutler and Madrian 1998; Baicker and Chandra 2005; Sommers 2005;). Studies have found that rising health insurance premiums reduce workers' probability of being employed, although workers' hours may rise or fall depending on the strategies chosen by different employers (Cutler and Madrian 1998; Baicker and Chandra 2005;). Anecdotal evidence is consistent with adverse employment effects as well, as government data, industry surveys, and interviews with employers indicate that many businesses are reluctant to hire full-time employees because health insurance has become one of their fastest-growing costs (Downey 2004; Porter 2004; Harper 2007;). However, the view that rapidly rising health care costs harm the U.S. economy is not without dissenters (Reinhardt 1989). Traditional economic models predict that rising health care costs are completely offset by a decline in wages, leaving total compensation, output, prices, and profits unchanged. Under this view, rising health care costs merely affect the composition of total compensation. Some economists also argue that rising health care costs could have a positive effect on some sectors of the economy. For example, Pauly (2003) has argued that rising health care spending naturally results in rapid growth in the health care and related sectors, and in employment and incomes for workers in those sectors. Consistent with this perspective, the Bureau of Labor Statistics (BLS 2006) reported that employment in the health care sector, which includes related industries such as pharmaceuticals and health insurance, grew by 21 percent between 1998 and 2006, whereas employment across all sectors grew by only 6 percent. Finally, in the long run increased spending on health care could affect the U.S. economy by improving health and productivity of U.S. workers (Cutler, Rosen, and Vijan 2006). Reliable evidence on the economic impact of rapid growth in health care costs is essential to inform policy debates. To date, however, the available evidence is limited to the effects of rising health insurance premiums on workers' probability and conditions of employment; no empirical study has directly assessed the impact of increasing health care costs on the economic performance of U.S. industries, and especially on outcomes beyond employment. This study aims to fill this gap by using national data for a 19-year period, from 1987 through 2005, to estimate the effect of growth in health care costs that is in excess of GDP growth on three important economic outcomes—employment, gross output, and value added to GDP—across 38 industries within the U.S. economy.