By Bryan Bezold
RCGA Director of Research and Chief Economist
The idea that healthcare costs are increasing at a rapid rate
is a widely held view. That view is also a correct one, as measured
by a variety of statistics. Employers are paying more for healthcare,
consumers are paying more for healthcare, and healthcare’s share
of total employee compensation is rising. It’s also true that
healthcare costs are likely to continue to increase rapidly,
rather than to moderate. Given that is the case, how do these
increases in healthcare costs affect the broader economy?
We can find evidence of the rising cost of healthcare in a number
of ways, but one place to start is from the consumer’s point-of-view.
Between 2004 and 2006, overall prices in the economy rose by
6.7 percent, as measured by the U.S. Bureau of Labor Statistics
(BLS) Consumer Price Index (CPI). The sub-index of the CPI that
measures healthcare costs specifically rose at a slightly faster
rate, 8.4 percent, over that same time period. That means that
healthcare prices for consumers rose more rapidly than overall
prices did. What’s really significant, however, is that healthcare
prices also rose at a faster pace than average annual pay did.
According to the BLS Census of Employment and Wages, average
annual pay for all industries in the U.S. rose from $37,765
in 2004 to $40,677 in 2006. That’s an increase of 7.7 percent.
It’s good to know that wages rose faster than overall prices
over that span; that’s the way the U.S. economy should work
as worker productivity rises over time. The fact that healthcare
prices rose faster than average annual pay, however, implies
that the average household had to spend less on healthcare or
less on some other good.
Employers also feel the impact of increased healthcare prices,
since many employers pay for a portion of their employees’ healthcare
through health insurance. According to the BLS Employment Cost
Index, the total cost to employees for one hour of labor, averaged
across all workers and industries, rose by 9.6 percent between
2004 and 2006. The subset of the total employment cost represented
by wages and salaries, however, grew by slightly less, 8.4 percent.
What accounted for the difference? The cost of providing health
insurance did. That share of total employment costs due to the
provision of health insurance to employees rose by an amazing
15.4 percent in just two years.
Put another way, the share of total employment costs due to
health insurance was 7.2 percent in 2004, but 7.6 percent by
the end of 2006. Wage and salary costs were 71.5 percent of
total compensation costs in the beginning of 2004 but 70.7 percent
at the end of 2006. So the bottom line on the average employee’s
paycheck grew more slowly than it otherwise would have, because
a larger share of the growth in total compensation was redirected
to health insurance.
The phenomenon is even more pronounced in Midwestern states
(regrettably, the BLS Employment Cost Index is not available
in a form specific to Missouri, Illinois, or the St. Louis region).
Total employment costs in Midwestern states rose by one percent
between the beginning of 2004 and the end of 2006. But since
the health insurance component of total employment costs rose
by 20 percent over those two years, the wage and salary share
actually fell by four percent. In Midwestern states, the cost
of providing health insurance went from 6.3 percent of total
employment costs in the beginning of 2004 to 7.5 percent by
the end of 2006.
This discrepancy between wage and salary costs and health insurance
costs explains the perceptions about healthcare costs. Employers
feel like they’re being squeezed, and employees feel like they
have to spend more on the same healthcare while their overall
compensation is rising only a bit faster than inflation. The
statistics show that both the employers’ and employees’ views
are essentially correct, especially since the CPI data suggests
that consumers’ out of pocket expenses on healthcare are rising
faster than their overall wages even as the cost of health insurance
takes a greater share of their total compensation.
What do these trends mean for the broader economy? If we assume
that healthcare spending is to some degree inelastic, which
is to say we will buy what we need almost regardless of the
price, then increases in healthcare costs mean that consumers
either spend less on other consumption, save less than they
would have otherwise, or draw down savings to pay for their
healthcare. In the end, the rising cost of healthcare will slow
the growth of the non-healthcare sectors of the economy.
It is important to note, though, that healthcare also contributes
to the economy through employ-ment and wages. It’s probably
not a coincidence that the healthcare sector is among the fastest
growing parts of both the U.S. and St. Louis economies; those
higher healthcare prices go in part to pay the salaries of skilled
medical practitioners and workers in the healthcare system at
a variety of skill levels and occupations. But healthcare’s
growing share of the U.S. economy essentially means that jobs
are being created in healthcare at the expense of jobs in other
sectors of the economy. In some ways, the question of whether
that phenomenon is good or bad is a subjective one.
The worrisome aspect of rising healthcare costs is due to the
fact that economists tend to think that, all other things being
equal; if the cost of hiring workers rises then businesses will
hire fewer of them. The concern is that continued healthcare
cost increases might lead to less hiring economy-wide. The solution,
however, is unclear. Many economists argue that if the market
for healthcare was more like other consumer markets, such as
markets for houses or cars, consumers would be able to make
better healthcare choices and use market forces, such as competition,
to slow down price increases. Others argue that it’s simply
impossible to treat healthcare markets like other consumer goods
markets—especially if, as mentioned above, healthcare spending
is essentially inelastic. Whichever is the case, finding a way
to slow down the growth of healthcare costs will benefit the
non-healthcare sectors of the economy.
