Employers' Health Insurance Cost Burden, 1996-2005

By Eibner, Christine; Marquis, M. Susan | Monthly Labor Review, June 2008 | Go to article overview

Employers' Health Insurance Cost Burden, 1996-2005


Eibner, Christine, Marquis, M. Susan, Monthly Labor Review


Data from the Employment Cost Index show that health insurance costs relative to payroll increased 34 percent between 1996 and 2005 and that the increase was largest for businesses paying low wages; simultaneously, data from the Employee Benefits Survey show that benefit packages became less generous, yet cost growth was not paralleled by a commensurate decrease in employer offers

In 2005, 62 percent of nonelderly Americans obtained health insurance coverage through employer-sponsored health insurance plans. (1) Many recent proposals to expand health insurance coverage build on the employer-based system. Both the Massachusetts health reform plan and the California Governor's health care reform proposal include mandates requiring employers either to offer health insurance or pay a fee. Yet, simultaneously, concerns over increasing health care costs have raised questions about the sustainability of the employer-based system. (2) One source cites figures which imply that total health spending in the United States increased by 93 or 94 percent between 1996 and 2005, compared with a 51-percent rise in gross domestic product. (3) Most economists believe that health insurance premium costs are ultimately passed back to employees in the form of reduced wages, so long-run compensation costs for employers are not affected by rising health care prices. But in the short run, if employers are unable to shift costs fully to workers, the increased cost of health insurance may cause labor market distortions, such as the hiring of more part-time workers who do not qualify for health benefits. (4) In addition, employers may be unable to shift health care costs to employees who are at or near the minimum wage.

As an alternative to shifting costs to workers through reduced wages, employers may pass increased costs along directly, either through requiring workers to contribute higher premiums or by providing less generous benefits. In either case, employer spending on health insurance may then remain unchanged despite rising health prices. Recent work by Jessica S. Banthin and Didem M. Bernard shows that individual out-of-pocket spending on health care increased substantially between 1996 and 2003, suggesting that some direct cost shifting may have occurred during that time. (5) Further, to the extent that workers drop coverage in response to rising prices, employer costs may remain relatively stable even if costs per worker increase. Several studies show that higher health insurance prices lead to lower employee takeup rates, even for individuals with access to employer-sponsored benefits. (6)

Because takeup rates have declined, it is not clear how employer spending on health insurance has changed in response to health care cost growth. This article explores trends in employers' health insurance cost burden, measured as the ratio of health insurance costs to total payroll, where payroll includes all wages and salaries paid to employees, including straight-time earnings, overtime pay, and pay for vacation and other leave. Evaluating trends in employers' health care cost burden and differences in the distribution of that burden across various types of businesses can lead to a better understanding of which businesses and workers are most vulnerable to erosion of their coverage and to labor market distortions in response to higher prices. Such an analysis also will shed light on the types of businesses and workers that may bear the greatest burden of employer responses to increased health care costs. For example, one researcher points out that if firms respond to higher health insurance costs by reducing wage increases, younger and less skilled workers may be at high risk for declining wages if businesses are required to offer health insurance.' More generally, a better understanding of the distribution of health insurance costs across employers over time will provide an insight into the long-term viability of employer health insurance mandates. …

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Employers' Health Insurance Cost Burden, 1996-2005
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