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

09/01/2007

Finally, the estimates from the full model (reported in columns (7) – (9) of Table 10) are used to predict the percentage changes in employment and value added that would have occurred for a slower (zero growth) or faster (3% per annum) growth in health care costs compared to the actual, observed growth of 2% per annum. These predictions are generated for four different industries – agriculture, communications, chemical products, and automobiles – that belong to four different quartiles (from lowest to highest) of the benefit share in total compensation during 1987. The predicted changes are shown in Figures 7 & 8 – for both employment and value added to GDP.13

The analysis shows that industries in all four quartiles would have benefited if health care costs had remained constant over time; in addition, the positive effects would have been larger for industries with a higher benefit share in 1987. Similarly, with a faster (3%) increase in health care costs, industries in all four quartiles would suffer losses in employment and value added, with greater losses accruing to industries that had higher benefit shares to start with. For example, the automobile industry, in the highest benefit share bracket in 1987, would have been hardest hit – suffering a 7% loss in both employment and value added for a faster cost growth scenario. The corresponding estimate for agriculture – in the lowest benefit share bracket – is 4%.

Using average employment and value added for each of these industries over this 19-year period, the predicted changes are interpreted in real terms and reported in Table 11. The numbers suggest that industries would have suffered significant gains (losses) from a slower (faster) cost growth scenario. For example, the automobile industry would have suffered losses of 71,000 employees and more than 6 billion dollars in value added if health care costs had grown at 3% per annum. The corresponding estimates for the communication industry are 69,000 employees and nearly 11 billion dollars.

 Figure 7: Percent Change in Employment for Alternative Cost Growth Scenarios:
For Industries in Different Quartiles (Lowest to Highest) of Benefit Share in 1987
Agriculture--(zero growth versus 2% growth,18),(3% growth versus 2% growth,-4);Communications--(zero growth versus 2% growth,23),(3% growth versus 2% growth,-5);Chemicals--(zero growth versus 2% growth,25),(3% growth versus 2% growth,-6); Automobile--(zero growth versus 2% growth,31),(3% growth versus 2% growth,-7.

Agriculture--(zero growth versus 2% growth,18),(3% growth versus 2% growth,-4);Communications--(zero growth versus 2% growth,23),(3% growth versus 2% growth,-5);Chemicals--(zero growth versus 2% growth,25),(3% growth versus 2% growth,-6); Automobile--(zero growth versus 2% growth,31),(3% growth versus 2% growth,-7.

Figure 8: Percent Change in Value Added for Alternative Cost Growth Scenarios:
For Industries in Different Quartiles (Lowest to Highest) of Benefit Share in 1987
bar chart

Agriculture--(zero growth versus 2% growth,18),(3% growth versus 2% growth,-4);Communications--(zero growth versus 2% growth,23),(3% growth versus 2% growth,-5);Chemicals--(zero growth versus 2% growth,25),(3% growth versus 2% growth,-6); Automobile--(zero growth versus 2% growth,32),(3% growth versus 2% growth,-7.

Table 11: Predicted Real Changes in Employment and Value Added for Alternative Cost Growth Scenarios
  Employment (in thousands) Value added (in millions of dollars)
Industry Average Gain from zero growth Loss from 3% growth Average Gain from zero growth Loss from 3% growth
Agriculture 1748 297 -70 107544 19358 -4302
Communications 1373 316 -69 215502 49566 -10775
Chemicals 1008 252 -61 143477 35869 -8609
Automobile 1011 314 -71 88031 28170 -6162
Note: Predicted gains/losses are based on observed averages in the data and predicted percentage changes in employment and value added from regressions using the full model.

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