Cost of Healthcare Status Quo Will Increasingly Fall on Middle Class

Even when the economy begins to improve, the problem of healthcare’s rising cost won’t go away, according to a study published in The New England Journal of Medicine by Daniel Polsky, PhD, and David Grande, MD, MPA, of the University of Pennsylvania’s Leonard Davis Institute of Health Economics. Although national income levels may rise, middle class American families won’t be shielded from the increasing burden of healthcare costs and will watch their standards of living continue to erode. Using a series of vignettes premised on typical healthcare budgets for a mixture of income levels, the authors found that wage growth for middle class workers will no longer be sufficient to keep pace with the rapidly escalating costs of healthcare. As healthcare swallows a larger proportion of family budgets, standards of living will decline.
 
“For many families, one inevitable solution will be dropping private health insurance coverage altogether,” write the authors.
 
The authors emphasize that the key to affordable healthcare for all is decisive action to contain healthcare costs. However, they caution that for healthcare reform based on private health insurance to be genuinely affordable, it will also require shifts in the distribution of healthcare costs within the population. The article, "The Burden of Health Care Costs for Working Families—Implications for Reform," notes that absolute increases in income for the nation as a whole are outpacing absolute increases in healthcare spending, suggesting that healthcare spending is not eroding the overall capacity to purchase other goods and services. But this is not the case for an increasing number of middle class families.
 
The authors arrive at this conclusion by making use of a practice common among health economists. In calculating employee healthcare expenditures, they include not only the most obvious categories of spending—out-of-pocket spending and premium contributions deducted from workers’ paychecks—but also forgone wages that employers instead contribute to premiums. They also include the share of income taxes that are devoted to public insurance programs such as Medicare and Medicaid. (People typically view employer premiums as a contribution from employers toward the cost of healthcare insurance, not as forgone economic opportunities for themselves). The authors note that as family income increases, employee-paid and employer-paid premiums as a percentage of overall compensation decrease. In other words, middle-income families pay a larger percentage of their income in the form of healthcare premiums and forgo a larger percentage of what would have been direct income to themselves compared to upper income families.
 
“Growth in employers’ contributions toward health insurance premiums translates into slower growth in wages than would otherwise have occurred,” says Polsky. “Because this fact is not apparent to most families, the healthcare reform proposals that aim to control costs do not receive the level of support they deserve.”
 
For example, healthcare expenditures, which represent 25% of a two-income family’s total $48,000 compensation, consist of employee-paid premiums and out-of pocket expenses (8.6%) as well as healthcare premiums paid by an employer with wages that the family otherwise would have received and by the government from a share of the taxes paid by the family (16.5%). In the case of a family with a combined income of $97,000, healthcare accounts for 16.7% of the compensation, with employee-paid premiums and out-of pocket expenses totaling 6.4% and employer contributions and taxes totaling 12.2%. At the $175,000 level, healthcare accounts for 13.9% of a family’s compensation, with 2.6% being employee-paid premiums and out-of pocket expenses and 11.3% coming in the form of employer contributions and taxes.
 
Further, while in all three cases per capita healthcare expenditures have grown at a rate of 3%, income has been growing at a slower rate for middle income families: 0.6% for the $48,000 household, 1% for the $97,000 household, and 1.5% for the $175,000 household. Faster income growth, coupled with a smaller percentage of income going toward health care, enables higher income households to more easily absorb increases in health care costs as well as have more money available for nonhealthcare goods and services than lower income families.
 
“The growth in the rate of spending on healthcare hits the household finances of middle-class workers harder because healthcare makes up a larger proportion of their budget,” says Grande. “Progressive taxation could simultaneously address the regressive nature of healthcare cost growth and provide financing for healthcare reform.”
 
— Source: University of Pennsylvania