The Effect of Health Care Cost Growth on the U.S. Economy. Footnotes


  1. Recent estimates suggest that the U.S. spends $98 billion in excess administrative costs and $66 billion in excess drug costs, compared to other nations with a single-payer system (Krugman, 2007).
  2. For example, in 1971, both the U.S. and Canada spent 7-8 percent of their GDP on health care. With the adoption of its single-payer health care system 25 years ago, Canada's ratio rose to 9.6 percent in 2006, while the U.S. with its largely employer-sponsored insurance coverage now spends 16 percent of its GDP on health care (Gerber, 2007).
  3. However, there is some dispute as to whether health care is a luxury good, i.e., whether the true income elasticity of health care expenditure is greater than one or not (Parkin et al., 1987; Blomqvist and Carter, 1997). Getzen (2000) reconciles the two opposing views by pointing out that a particular finding depends on the level of analysis. While micro analyses typically find that individual income elasticities were small, analysis at the macro level tends to support the “luxury good” hypothesis. He further demonstrates that the correlation of income with health expenditures becomes larger as the level of aggregation becomes larger, so much so, that for nations, differences in per capita income explain over 90 percent of the variation in health care expenditure (Getzen 2006).
  5. Given the rapid rise in health care costs and the growing number of uninsured, there have been a number of recent health care proposals that aim to provide insurance to the estimated 47 million uninsured Americans (Samuelson, 2007). However, commentators argue that broader coverage would follow once the problem of high health care costs were resolved, while expanding coverage without addressing inefficiency or long-term cost control would in fact lead to even higher costs, health care rationing, and a greater number of uninsured in the future (e.g., see Emanuel and Fuchs, 2007; Quinn, 2007).
  6. Since the Kaiser/HRET employee benefits survey focuses on employer-sponsored health benefits, information on the use of medical care is not available from this survey. Hence, it is not known whether the reported decline in take-up rates of health insurance is also associated with lower medical care use.
  7. Some industries that could not be consistently matched across the two time periods were omitted. However, the final dataset consists of industries from all the major sectors and hence is representative of all industry types over 1987-2005.
  8. The medical care price index was divided by the consumer price index (CPI) to arrive at changes in real medical care prices over time. This deflated medical care price index registered an average increase of 2% per annum during this time period.
  9. Note that percentage change is more meaningful in this context rather than change in levels, since various industries would have very different levels of output and employment to start with.
  10. Since the coefficient estimates in the log specification is the percentage change in a particular outcome as opposed to change in levels (in the specification without logs), the estimates from the log specification are more appropriate for interpreting the results.
  11. The results for the effect of unionization are in broad agreement with previous findings in the literature that indicate that greater unionization typically leads to a decline in employment and output (Lalonde et al. 1996, Vedder and Gallaway 2002).
  12. A separate analysis was performed looking at the effect of employee cost sharing on industrial employment and output. While the results suggested that greater employee cost sharing could potentially mitigate the adverse impact of rising health care costs for industries with a higher benefit share, this analysis could only be carried out at the sectoral level in the absence of comparable data at a more disaggregated level, and as such, these results lacked precision due to a significantly smaller sample size. Hence, those results are not reported, but are available on request.
  13. Since these predictions are based on the regression models estimated above, all factors that affect employment and output other than the rate of health care cost growth are held constant in generating the predictions for different cost growth scenarios. Therefore, these are only meant to provide an easier way of interpreting the main results from the regressions, and to compare employment and output under the different scenarios, given the model assumptions.
  14. While it appears that the increase in per capita state government expenditure on health was around $30 in all four quartiles, this is due to rounding up to 2 decimal places. The average increase was actually between $25 – $28 in the bottom two quartiles, and around $33 – $34 in the upper two quartiles of the change in per capita health expenditure.

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