Rising health care costs have generated concerns that continued growth could adversely affect the nation’s economy, as well as pose problems for particular sectors of the economy, such as employers and households. This report evaluated how increased spending on health care affected aggregate economic indicators and individual sectors. As a basis for this investigation, a thorough and detailed review of the literature was conducted that included anecdotal evidence, survey findings and the peer reviewed literature. The literature review highlighted the economic effects of health care cost growth, and identified possible mechanisms through which cost growth could affect the aggregate economy, as well as government, households and business. The main findings from the review of the empirical literature were as follows.
- Negative Effect on Economy: Anecdotal evidence cited in newspapers and the popular media suggests that rising health care costs have a negative effect on the U.S. economy. However, no large scale and empirically rigorous studies have been conducted to determine the causal impact of health care cost growth on aggregate economic outcomes such as per capita income and inflation. Studies that examine the association between per capita income or GDP and health care costs almost always find a positive relationship. This is possibly because economic growth leads to greater spending on health care.
- Positive Effect on Economy: Several economists believe that rising health care costs could improve health and consequently improve labor productivity. However, no large scale and empirically rigorous studies have established that rising health care costs have increased labor productivity in the U.S.
- Effect on employers: There is very little rigorous empirical research on how health care costs affect profits, revenues, output, or competitiveness of U.S. employers. Some evidence suggests that rising health care costs have led to a decline in employment.While traditional economic models suggest that health care cost growth has no effect on employers if workers bear the costs, others have argued that cost growth will lead to higher prices and lower output, less employment, and lower profits if employers bear some of the increased burden from rising health care costs. For example, one study finds that a 10% increase in health insurance premiums reduces the probability of being employed by 1.6%, reduces hours worked by 1%, and increases the probability of part-time work by 1.9%. The current literature in this area could be improved by investigating into the causal link between employers’ share of the growing burden of health care costs and firm employment and output.
- Effect on governments: The share of health care expenditures borne by federal, state and local governments has increased over time. There is some evidence that governments are cutting down on health expenditures by reducing reimbursement to providers, increasing patient cost sharing, reducing eligibility and generosity of public insurance and reducing expenditures on other sectors of the economy. For example, in 2005, eight states reduced or restricted Medicaid eligibility and seven reduced program benefits. Also, one study found that each new dollar in Medicaid spending crowds out 6 to 7 cents of higher education appropriations. However, more research is needed to systematically analyze the effects of rising health care expenditures on government budgets and expenditures. Given that most of the literature in this area is based on anecdotal reports or descriptive evidence, there is significant scope for improving the current methods by using longitudinal data and more rigorous empirical analysis.
- Effects on consumers: There is some evidence that rising health care expenditures have led to a rise in uninsurance rates among U.S. households. Evidence from recent surveys also indicates that a significant proportion of consumers, especially the uninsured, are burdened by debt due to medical bills and sometimes forego needed medical care and other spending due to high medical care costs.
In summary, although prior work has examined several aspects of the effect of rising health care costs on the economy and its sectors, several gaps remain. Available data from various sources were therefore analyzed in an attempt to answer some of the most pressing gaps in the literature – (1) What is the impact of rising health care spending on aggregate economic indicators?, (2) What is the impact on businesses and do the effects vary by industry?, (3) What is the impact on government budgets and expenditures? The main findings from this analysis are described below.
- There is a significant and positive relationship between per capita health expenditure and per capita GSP. Although available evidence suggests that health care costs can have both a positive and a negative impact on the economy, our finding of a positive association between health care expenditures and per capita GSP is most likely due to reverse causation – states with high or rising incomes spend more on health care and experience a faster increase in health care expenditures. This finding is consistent with several macroeconomic studies that have shown such a link between per capita income and per capita health care costs. Hence, the positive relationship between health care cost growth and per capita GSP does not rule out the possibility that health care cost growth has a negative effect on the economy.
- Rising health care costs had a larger negative effect on employment and output of industries where benefits constitute a higher share of compensation. Standard economic models predict that an increase in employee health care costs would be financed by an equivalent reduction in cash wages. Thus, rising health care costs should have no effect on employment or output. However, if rising health care costs lead to a less than one-for-one reduction in cash wages then rising health care costs will increase total compensation, consequently reducing employment and output. Thus, industries where health care benefits are a larger share of total employee compensation will experience a larger increase in total compensation, consequently leading to a larger reduction in employment and output. Our empirical findings are consistent with this hypothesis and show that employment and output in industries where benefits were a larger share of compensation were hit harder by health care cost inflation.
- There is a significant positive correlation between per capita health expenditure and state government expenditures on health as well as on other sectors. The empirical findings from this analysis show that state government expenditures on various sectors including health care seem to rise together with rising health care costs. This could be because sectors such as health and education compete for allocation of funds so that an increase in health expenditures is accompanied by a similar increase in several other sectors. We do not find any evidence that rising health expenditure crowds out other components of state expenditure. On the contrary, we find evidence that government’s total expenditure and debt increase over time as health care costs and state government expenditures rise in tandem.
The literature review and empirical analysis highlighted various mechanisms through which rising health expenditures could affect the economy and its various sectors. The range of mechanisms identified in this report, together with the empirical evidence on the effects of cost increases, lay a strong foundation for carrying out a more comprehensive model-based analysis that simultaneously models all potential mechanisms to predict the long term impact of rising health care costs on the U.S. economy. Such an analysis is beyond the scope of this report but would be an important avenue for future research.