Academic journal article International Advances in Economic Research

The Macroeconomic Consequences of Financing Health Insurance

Academic journal article International Advances in Economic Research

The Macroeconomic Consequences of Financing Health Insurance

Article excerpt

Published online: 6 December 2012

[c] International Atlantic Economic Society 2012

Abstract Employer-financed health insurance systems like those used in the United States distort firms' labor demand and adversely affect the economy. Since such costs vary with employment rather than hours worked, firms have an incentive to increase output by increasing worker hours rather than employment. Given that the returns to employment exceed the returns to hours worked, this results in lower levels of employment and output. In this paper, we construct a heterogeneous agent general equilibrium model where individuals differ with respect to their productivity and employment opportunities. Calibrating the model to the U.S. economy, we generate steady state results for several alternative models for financing health insurance: one in which health insurance is financed primarily through employer contributions that vary with employment, a second where insurance is funded through a non-distortionary, lump-sum tax, and a third where insurance is funded by a payroll tax. We measure the effects of each of the alternatives on output, employment, hours worked, and wages.

Keywords Health care financing * Employer-based health insurance Universal health care

JEL E62 * 041 * C68

Introduction

Employer-financed health insurance systems like those used in the United States distort firms' labor demand and adversely affect the economy. Unlike most developed countries, the United States has primarily financed health insurance through employers. de Navas-Walt et al. (2004) report that about 60% of Americans obtain health insurance through employers, though this percentage has been steadily declining for decades. According to the Bureau of Labor Statistics (2005), healthcare costs now represent over 7% of the average employer's total compensation costs. Since such costs vary only with employment, rather than with hours worked, firms have an incentive to increase worker hours rather than employment.

While it is clear that the costs of providing health insurance are significant, little attention has been paid to quantifying the macroeconomic consequences of employer-based health insurance (EBHI) systems. The literature is clear on the fact that EBHI affects labor market outcomes. Cutler and Madrian (1998) found that rising healthcare costs accounted for up to a 3% increase in hours worked in the U.S. during the 1980s. More recently, Baiker and Chandra (2005) estimated that rising insurance premiums led to an 8% decline in employment between 1996 and 2002. Given these labor market distortions, it is possible that the U.S.'s reliance on employer-funded health insurance is reducing macroeconomic output. Furthermore, these distortions may also have implications for wage inequality.

In this paper, we attempt to quantify the macroeconomic consequences of alternative models for financing healthcare. Specifically, we address two questions. First, what are the distortionary costs of the U.S.'s existing EBHI system? And secondly, what would be the effect of adopting a single-payer, universal healthcare system on employment, hours worked, wages, and output? To answer these questions, we construct a heterogeneous agent general equilibrium model where individuals differ with respect to their productivity and employment opportunities. Each period, firms make a decision as to how many workers of each type to hire, as well as a decision on hours per worker. The benchmark model is calibrated to match the most pertinent aspects of the U.S. economy. From the benchmark model, aggregate employment, output, and asset distribution are computed and compared to those generated from a number of alternative models where health insurance is funded at the national level through either a lump-sum tax on employers or payroll taxes. The results of these experiments have important implications for ongoing policy debates over healthcare reform. …

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