Rapid growth in health insurance premiums also affects households. Firms faced with rising health care costs may limit wage increases, reduce health insurance benefits or require employees to pay a greater share of costs, or increase the number of hours worked (Goldman, Sood & Leibowitz, 2005; Cutler and Madrian 1996). Goldman, Sood & Leibowitz (2005) estimate that when health insurance premiums rise, companies finance about two-thirds of the premium increase by reducing wages and the remaining one-third by reducing benefits. In 2002, the average household spent $2,350, or 4.8% of income, on health care, an increase from 1999, when average household health care spending was $1,959, or 4.5% of income. As more costs are shifted to consumers, they may drop health insurance coverage or reduce their demand for other goods and services.5
If companies are unable to offset increases in health care premiums by adjusting wages, benefits, or hours of work, they may reduce employment or at least cut back on full-time employees who are eligible for benefits, replacing them with part-time employees or temporary workers who are not eligible. Many firms also face quickly rising costs of providing health insurance to retirees. Below we summarize the key findings about how health care cost growth affects households, including recent trends.
Recent trends: Data from the Kaiser/HRET survey show that employer health care premiums increased by 73% between 2000 and 2005 (KFF, 2006). Employee contributions for individual and family plans increased at similar rates while the proportion of premiums paid by employees remained relatively stable since 2000 (16% for individual coverage and 27% for family coverage. Nearly all large firms offer health insurance, and the proportion of large firms offering health benefits remained virtually unchanged between 2000 (99%) and 2005 (98%). However, offer rates by small firms declined from 68% in 2000 to 59% in 2005. The proportion of employees with health coverage from their own employer fell by 4 percentage points. The rate of those without insurance for the whole year has grown 1.5 percentage points during 2000 – 2004 (Gould, 2005).
Rising health care costs could increase the percentage of the population that is uninsured. Chernew et al., (2005) analyze data on two cohorts (1989-1991 and 1998-2000) of non-elderly Americans residing in 64 large Metropolitan Statistical Areas to estimate the relationship between rising health insurance costs and probability of being insured. During the study period, insurance coverage fell by 3.1 percentage points and premiums increased by 53%. They find that over half of the decline in coverage rates experienced over the 1990s is attributable to the increase in health insurance costs. They project that the number of uninsured could increase by 1.9 million to 6.3 million in the next decade if growth in real per capita costs outpaced growth in per capita GDP by 1 to 3 percentage points. Data from Kaiser/HRET survey show that the proportion of large employers offering retiree health insurance declined from 66% in 1988 to 33% in 2005 (KFF, 2006). Fronstin (2005) estimates that the percentage of early retirees with health benefits dropped from 39.2% in 1997 to 28.7% in 2002. The proportion of Medicare eligible retirees with health benefits dropped from 28.1% to 25.5%. Gilmer and Kronick (2005) estimate that if current trends continue, the number of uninsured Americans will grow from 45 million in 2003 to 56 million in 2013.
Cutler (2003) analyzes data from the CPS (1988, 1993, 2001) and the Kaiser/HRET surveys to estimate the relationship between employee share of health care costs and take-up rates. He finds that despite the tax exempt status of employer contributions to health insurance premiums, employers have been increasing employee contributions towards health insurance premiums. In fact, the rising employee share of costs can explain 75% of the decline in take-up rates during this period. He posits that the most likely reason for higher employee costs is the underlying trend of rising medical care costs. He also analyzes data on overall insurance rates and estimates that the decline in take-up rather than changes in offer and eligibility rates can explain roughly 60% of the decline in employer provided coverage. Cooper and Schone (1997) reach similar conclusions. They show that most of the decline in employer provided insurance between 1987 and 1996 can be explained by a decline in take-up rates. A recent issue brief by the Kaiser Family Foundation uses the two most recent years of data from the Kaiser/HRET employee benefits survey and finds a negative relationship between employee share of premiums and take-up rates for health insurance (KFF, 2007).6
Rising health care costs could lead to less generous health plans for households. Faced with growing health insurance costs, employers might switch to low-premium, high-deductible plans for their workers. For example, Wal-Mart Stores Inc. intends to make its primary health coverage a low-premium, high-deductible plan. Under its new health plan, new hires will have small premiums deducted from their paychecks, about $10 a week, and will face higher deductibles when paying for medical care. They will be offered special health savings accounts in which they can set aside money in interest-bearing accounts to save for medical needs. (McClatchy Newspapers, 2006). Such changes in health plans offered by employers can potentially force households to forego needed medical care and treatments.
Rising health care costs could increase consumer debt and reduce access to care. Data from the 2003 Commonwealth Fund Biennial Health Insurance Survey show that an estimated 77 million (37%) Americans age 19 and older have difficulty paying medical bills, have accrued medical debt, or both. Nearly two thirds of people with a medical bill or debt problem went without needed care because of cost – nearly three times the rate of those without these financial problems (Doty et al., 2005). Medical debt is also related to having subsequent housing problems. For example, in a recent survey of low and middle income households, 50% reported having medical debt and a quarter of those reported subsequent housing problems as a result of the debt (Seifert, 2005). Himmelstein et al. (2005) surveyed personal bankruptcy filers in five federal courts and found that about half cited medical reasons as a cause of their bankruptcy. Among those whose illnesses led to bankruptcy, out-of-pocket costs averaged $11,854 since the start of illness.
A recent report released by the Access Project documents how low and middle income households are turning to credit cards to pay for medical care (Zeldin and Rukavina, 2007). Based on a national telephone survey of over 1,100 low and middle income households, the report shows that nearly a third (29%) of the respondents reported that medical expenses contributed to their current level of credit card debt. In households with medical debt, the average credit card debt was significantly higher (46%) than in those households without medical expenses as a contributing factor in their overall credit card debt. Although uninsured respondents had the highest levels of credit card debt, even respondents with health insurance were not completely shielded from the medical debt problem.
The Access Project also carried out some community-specific studies on the problem of medical debt. For example, Kohn et al. (2005) examine the scope and consequences of medical debt for people in Kansas, and find that medical bills can exhaust family savings, health insurance can fail to protect families from crushing debt problems, and that medical debt can create barriers to people’s access to future medical services. Another report from Massachusetts shows that people can accumulate medical debt that causes them to forgo further care, damages their credit, and creates housing and employment problems (Pryor and Gurewich, 2004).
Rising health insurance costs could affect labor market outcomes. As mentioned before, Baicker and Chandra (2005) estimate that a 10% increase in health insurance premiums reduces the probability of being employed by 1.6%, and conditional on employment, increases the probability of part-time work by 1.9%. Johnson et al. (2003) find that insurance costs significantly reduce retirement rates for workers aged 51 to 61.
Rising health care costs mean less money for non health care consumption, other benefits, and retirement. Johnson and Penner (2004) estimate that in 2030, out-of-pocket health care costs will take up roughly one third of after-tax income for older adults, up from roughly 16% in 2000. Follette & Sheiner (2005) estimate that a 2 percentage point excess growth in per capita health care spending relative to per capita GDP will lead to decline in non-health consumption by 2040 and will leave no resources for non-health care consumption within 75 years. A recent report suggests that a 65-year-old couple retiring in 2007 will need about $215,000 to cover medical costs in retirement, up 7.5 percent from the previous year. For about 40 percent of the retirees whose primary source of income is Social Security, health expenses could eat up as much as half of their retirement benefits (Hamilton, 2007).
Goldman, Sood and Leibowitz (2005) show that employees facing an increase in the price of health insurance respond by lowering their level of insurance coverage. However, employees do not completely shift increases in expenditures away from health insurance—in fact, increases in prices lead to increases in health insurance expenditures. These increases are accommodated by reducing both take-home income and other benefits such as life insurance, disability insurance, dental insurance, and retirement benefits. For example, they estimate that a $1 increase in premiums leads to a 52-cent increase in health insurance expenditures. Approximately 2/3 of this increase is financed through reduced wages and 1/3 through other benefits. These results suggest that rising health insurance prices not only reduce resources for current consumption but also lower insurance purchases against a variety of risks.
Consumers are concerned about rising health care costs. Rising costs of health insurance create uneasiness among voters. Results from the annual health confidence survey suggest more than half of those surveyed were dissatisfied with health insurance costs. Results from an ABC/Washington Post poll found that 75% of the people would prefer to have employer-sponsored health insurance rather than a $6,700 raise (Alonso-Zaldivar, 2006).