Health Care and Insurance and Economy and Environment and Government

ECONOMIC ANALYSIS: Rising health care costs killing jobs and income

September 5, 2005

Most of us have been in a doctor's office, and many of us have had conditions that require treatment. But few of us are likely to hear any information presented on the cost of different treatment options along with their benefits, especially if we are one of the 170 million people covered by employer- or governmentprovided health insurance.

It is an amazing fact that nearly $3 trillion of health care goods and services are ordered off a menu that has no prices on it.

Yet we pay a staggering cost for this privilege. Most of us are aware that the cost of health care has exploded in recent years, and that the burden on businesses and governments-as well as individuals-has been more than some can bear.

Controlling the growth of what was once a fringe benefit is now a central focus of countless companies that have only a limited ability to pass on galloping health care costs.

Governments are in no better shape. Medicaid expenditures are devouring state budgets, while the projections for the federal government's flagship Medicare program call for revenue shortfalls within a decade.

Indeed, if Sarbanes-Oxley requirements were mandated for-instead of by-the federal government, the extent of the future liabilities revealed in health care entitlement programs would overwhelm our ability to comprehend them.

What is less obvious to most of us is that health care costs are a killer of jobs and income.

Data compiled by the National Bureau of Economic Research recently adds up the collective result of individual business owners' efforts to contain health care costs. The results confirm what many of us have long suspected: In a world where employers pick up a large share of their workers' health care expenses, climbing costs make it harder to find and keep a job.

Indeed, NBER researchers estimate that every 10-percent rise in health insurance premiums makes it 1.6 percent less likely you will find a job, and 3.8 percent less likely your job will provide health care benefits.

But costs hurt even those who hang onto their jobs. NBER says the same 10-percent rise in premiums also produces a 2.3-percent decline in wages, and a 1-percent reduction in hours.

The mechanisms that produce these results are familiar. For many types of jobs, particularly those paying lower wages, the response to rising health care costs is to eliminate health care benefits. But higher-paying jobs are affected as well, with higher premium increases and lower wage increases going hand in hand.

These findings put in perspective the often shrill, hands-on-hips insistence that the U.S. economic recovery has failed to create enough new jobs. In an environment where health insurance premiums have increased 59 percent since 2000, can we really expect employers to open the job-hiring spigot and increase their exposure?

Those who are wondering out loud what the solution to this situation is should know this: The private sector is already implementing a solution, and it isn't pretty. Without a fundamental change in the ground rules that govern how we pay for health care, you will see more undesirable outcomes like these as companies try-out of sheer necessity-to limit their exposure to runaway costs.

The question we should be asking is why those costs are so frighteningly high to begin with. Perhaps it has something to do with the fact that the health care menu has no prices on it?

Outside of a small number of economists, no one seems to want to fess up to that reality. But until we accept the sometimes-harsh discipline the price system imposes on every other part of the economy, it's hard to see anything changing soon.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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