Fading Private Health Insurance

Today, the U.S. Supreme Court is scheduled to start hearing the oral arguments over President Obama\’s signature health-care  reform legislation. I\’ll save you from my personal uninformed blathering about constitutional law–it will doubtless be easy to find such opinionizing elsewhere on the web. But as a backdrop, it seemed useful to note the basic fact that in the U.S., employer-provided health insurance is fading.

Here\’s a figure based on data from the U.S. Census Bureau (see Table HIB-1 here). The top line shows that employer-based health insurance covered 65% of the U.S. population in 2000, and 55% of the U.S. population in 2010. This decline seems to have accelerated since the start of the Great Recession, but it was well underway already. On the other side, the share of the U.S. population covered by Medicaid has risen from 10% in 2000 to 16% now, and the proportion of Americans without health insurance coverage has risen from 13.6% in 2000 to 16.3% in 2010. Other categories not shown in the figure have changed less. Direct purchase of private health insurance is down a bit, from 10.6% of the population in 1999 to 9.8% in 2010. Medicare and military health insurance have expanded a bit, with Medicare rising from 13.4% of the population in 1999 to 14.5% in 2010, and military health insurance rising from 3.1% of the population in 1999 to 4.2% of the population in 2010. 

The overall pattern of the Census Bureau figures are replicated by other data, like the phone surveys done for the National Institute for Health Care Reform, and reported in its March 2012 report \”Great Recession Accelerated Long-Term Decline of Employer Health Coverage,\” by Chapin White and James D. Reschovsky. As White and Reschovsky emphasize: 
\”The recent experience with employer-sponsored health insurance could be viewed as an acute illness aggravating a chronic condition. The acute illness—the sluggish economy and weak employment situation—likely will resolve at some point. But the underlying chronic condition—rising health care costs—likely will persist. Rising health care costs help explain why employers have become less and less likely to offer employer-sponsored coverage as a fringe benefit. Rising costs also have prompted employers to require workers to contribute a larger share of premiums and shoulder increased patient cost sharing at the point of service through higher deductibles, coinsurance and copayments. If health care cost increases continue to outpace wage increases, more workers are likely to conclude that health coverage is not worth the cost. … 
\”There has been vigorous debate about the effects of national health reform on employer-sponsored insurance. The best estimates project that health reform will have little net impact, but estimates vary widely. The debate, however, often misses a key point—employer-sponsored insurance is likely to continue to erode with or without health reform, especially among lower-income families and those employed by small firms. … Perhaps more central to the long-term future of employer-sponsored insurance is whether the health care delivery and payment system reforms, which are other important components of health reform, succeed in slowing the growth of health care costs and health insurance premiums faced by employers and employees.\”

It\’s worth remembering, for those who haven\’t read the history, that the predominance of employer-provided health insurance in the U.S. economy is an historical accident. Melissa Thomasson offers a nice overview in \”From Sickness to Health: The Twentieth-Century Development of U.S. Health Insurance,\” in the July 2002 issue of Explorations in Economic History, but that\’s not freely available on-line. However, Thomasson offers a brief overview at the Economic History Association website here.

Thomasson points out that the number of Americans with health insurance went from 15 million in 1940 to 130 million in 1960. Blue Cross/Blue Shield plans began to be established in the 1930s. Then in World War II, the fateful decision was made to encourage employers to provide health insurance, and not to tax individuals on the value of that health insurance they received. Here\’s Thomasson:

\”During World War II, wage and price controls prevented employers from using wages to compete for scarce labor. Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers. … [I]n 1949, the National Labor Relations Board ruled in a dispute between the Inland Steel Co. and the United Steelworkers Union that the term \”wages\” included pension and insurance benefits. Therefore, when negotiating for wages, the union was allowed to negotiate benefit packages on behalf of workers as well. This ruling, affirmed later by the U.S. Supreme Court, further reinforced the employment-based system.

\”Perhaps the most influential aspect of government intervention that shaped the employer-based system of health insurance was the tax treatment of employer-provided contributions to employee health insurance plans. First, employers did not have to pay payroll tax on their contributions to employee health plans. Further, under certain circumstances, employees did not have to pay income tax on their employer\’s contributions to their health insurance plans. The first such exclusion occurred under an administrative ruling handed down in 1943 which stated that payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income. While this particular ruling was highly restrictive and limited in its applicability, it was codified and extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer contributions to employee health plans were exempt from employee taxable income. As a result of this tax-advantaged form of compensation, the demand for health insurance further increased throughout the 1950s …\”

I have no insight into how the U.S. Supreme Court will rule on the Obama health care legislation. But the U.S. health care system continues to face severe problems: tens of millions of uninsured Americans with their share of the U.S. population rising, rises in health care costs that continually outstrip inflation, and the ongoing decline of employer-provided health insurance, the main mechanism through which a majority of Americans have received their health insurance in the last half-century. Whether the Affordable Care Act is ruled constitutional or not, it\’s abundantly clear that it won\’t be a final answer to these issues; indeed, it may well end up being a transitional piece of legislation that needs to be thoroughly revisited and reworked. For example, the Congressional Budget Office recently estimated that under the Affordable Care Act, after taking into account that some firms will expand health insurance coverage and others will contract or not offer it, by 2019-2022, about 3-5 million fewer people on net will have employer-sponsored coverage as a result of the law.

Note:  Thanks to Danlu Hu for putting together the figure on health insurance coverage.

Health Care Costs are Eating Your Pay Raise

Rand Research Highlights, based on the work of David I. Auerbach and Arthur L. Kellerman, asks: \”How Does Growth in Health Care Costs Affect the American Family?\”
\”In the ten-year period between 1999 and 2009, U.S. health care spending nearly doubled, climbing from $1.3 trillion to $2.5 trillion. In 2009, while the rest of the U.S. economy plunged into recession and millions lost their jobs, health care costs grew by 4 percent. As a result, the percentage of our nation’s gross domestic product (GDP) devoted to health care reached 17.6 percent, up from 13.8 percent only ten years earlier.
Although these numbers are striking, they do not easily translate into figures that are meaningful to individual Americans.

\”To paint an accurate picture of how health care cost growth is affecting the finances of a typical American family, RAND Health researchers combined data from multiple sources to depict the effects of rising health care costs on a median income married couple with two children covered by employer-sponsored insurance. The analysis compared the family’s health care cost burden in 1999 with that incurred in 2009. The take-away message: Although family income grew throughout the decade, the financial benefits that the
family might have realized were largely consumed by health care cost growth, leaving them with only $95 more per month than in 1999. Had health care costs tracked the rise in the Consumer Price Index, rather than outpacing it, an average American family would have had an additional $450 per month—more than $5,000 per year—to spend on other priorities.\”

Here are the calculations for that median family. The row showing \”Taxes devoted to health care\” is the cost of Medicare, Medicaid, and other public health programs.

In short, when you see comments about how pay hasn\’t gone up much in recent years, one big reason is that health care costs are swallowing the gains. Moreover, friends of mine in public policy circles sometimes point out, with a powerless shrug, that if the rate of increase in health care costs doesn\’t drop substantially, there isn\’t going to be room for any other government priorities–and that\’s true whether your priorities are lower taxes or preserving or even increasing spending on other programs.

Cancer Rates Continue Falling

My wife sometimes notes, with wry incredulity, that economists seem to feel as if they have a more-informed opinion than non-economists on every topic. Thus, I smiled when ran across this press release last week: American Cancer Society report finds continued progress in reducing cancer mortality.\” As they report: \”The American Cancer Society\’s annual cancer statistics report shows that between 2004 and 2008, overall cancer incidence rates declined by 0.6% per year in men and were stable in women, while cancer death rates decreased by 1.8% per year in men and by 1.6% per year in women. The report, Cancer Statistics 2012, published online ahead of print in CA: A Cancer Journal for Clinicians says over the past 10 years of available data (1999-2008), cancer death rates have declined in men and women of every racial/ethnic group with the exception of American Indians/Alaska Natives, among whom rates have remained stable. The reduction in overall cancer death rates since 1990 in men and 1991 in women translates to the avoidance of more than a million total deaths from cancer during that time period.\”

Of course, economists also believe that we have useful contributions to make to  the debate over reducing cancer. (Cue wife and children, rolling their eyes.)  In the Fall 2008 issue of my own Journal of Economic Perspectives, David M. Cutler wrote: \”Are We Finally Winning the War on Cancer?\” The article is freely available to anyone, like all issues of the JEP from the current issue back to 1994, courtesy of the American Economic Association. Here\’s the abstract:

\”President Nixon declared what came to be known as the \”war on cancer\” in 1971 in his State of the Union address. At first the war on cancer went poorly: despite a substantial increase in resources, age-adjusted cancer mortality increased by 8 percent between 1971 and 1990, twice the increase from 1950 through 1971. However, between 1990 and 2004, age-adjusted cancer mortality fell by 13 percent. This drop translates into an increase in life expectancy at birth of half a year–roughly a quarter of the two-year increase in life expectancy over this time period and a third of the increase in life expectancy at age 45. The decline brings cancer mortality to its lowest level in 60 years. In the war on cancer, optimism has replaced pessimism. In this paper, I evaluate the reasons for the reduction in cancer mortality. I highlight three factors as leading to improved survival. Most important is cancer screening: mammography for breast cancer and colonoscopy for colorectal cancer. These technologies have had the largest impact on survival, at relatively moderate cost. Second in importance are personal behaviors, especially the reduction in smoking. Tobacco-related mortality reduction is among the major factors associated with better health, likely at a cost worth paying. Third in importance, and more controversial, are treatment changes. Improvements in surgery, radiation, and chemotherapy have contributed to improved survival for a number of cancers, but at high cost. The major challenge for cancer care in the future is likely to be the balancing act between what we are able to do and what it makes sense to pay for.\”

What Would Uninsured Americans Pay for Health Insurance?

One of the big questions about Americans without health insurance is how much of a subsidy they would need in order to purchase such insurance willingly. The existing evidence on this point isn\’t especially on-point: for example, it sometimes involves looking across firms at the generosity of the health insurance policies that they offer, then looking at how many employees take up policies at each firm, and then drawing conclusions about the price people are willing to pay for insurance coverage. It\’s not clear how results from such studies would extrapolate to buying health insurance directly.

Alan Krueger and Ilyana Kuziemko tackle this question with survey data in a recent working paper. The Gallup Poll included some questions that they wrote in daily polling during late August and early Septemer 2008. The opening question took the form: \”If you could get a health insurance policy for yourself that is as good as the one that members of Congress have, given yourcurrent fi nancial situation, would you buy it for $X a year, which works out to $X/12 per month?\” As they explain, individuals were randomly assigned different starting values for X, and then if individuals said \”no,\” they were asked a series of follow-up questions with a lower X. The survey also asked lots of other questions, so it was possible to figure out who was uninsured, along with health status and other useful variables. Based on this data, they calculated a demand curve for subsidized health care which looks like this:

They write: \”Our results suggest that subsidizing the purchase of insurance plans would signi ficantly reduce the population of the uninsured. For example, we estimate that about sixty percentof the uninsured would voluntarily enroll for an annual premium of $2,000. Under the current specfii cation of subsidies in the ACA [the Affordable Care Act of 2010], we estimate that over 75 percent of uninsured adults would enroll, implying that some 39 million uninsured individuals would gain coverage as a result of the law. We also estimate that stripping the individual mandate fromthe law|the constitutionality of which is being challenged in federal court|would lead to between 7 and 12 million fewer individuals gaining coverage.\”

Of course, as the authors\’ recognize and try to address in various ways, there\’s always reason to be dubious about survey evidence: it\’s easier to say that you would buy insurance at a certain price than actually to buy it. But as part of an accumulation of evidence on what it would take to cover the uninsured, the results struck me as intriguing.

Medical tourism

John Rosenthal has written an interesting piece for the Milken Institute Review on the phenomenon of \”medical tourism, that is, Americans going abroad to have medical procedures performed. The article has lots of interesting details and anecdotes, but here is some of the big picture.

How many people go abroad for medical procedures? \”In 2009, Deloitte revised its estimates down to 648,000 travelers annually, but forecast 35 percent increases in each of the threesucceeding years. It predicts that more than1.6 million Americans will travel abroad for health care in 2012.\”

What is the assurance of quality? \”Accreditation from the Joint Commission International (JCI) is recognized worldwide as the gold standard for hospitals. JCI screens facilities for the condition of their physical plants, their management of medications, the quality of their surgical care, their commitment to continuous improvement, and their responsiveness to feedback from patients. In the United States, the organization accredits more than 17,000 facilities, from hospitals to laboratories to long-term-care centers. JCI began accrediting hospitals outside the country in 1999. Today, the organization vouches for the quality of care at some 400 institutions in 45 countries from Austria to Yemen.\”

What are some of the potential cost savings?

Incidentally, the Milken Institute Review, with Peter Passell  as editor-in-chief, is a consistently excellent source for lively and well-written essays on economic policy. The contents are available free on-line, although you do need to fill out a registration form.