FRBSF Economic Letter
2006-25; September 29, 2006
Health Insurance Costs and Declining Coverage
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As discussed in a recent FRBSF Economic Letter (Jones
2005), the share of health-care spending in GDP has been rising
rapidly in the United States and other advanced industrial countries
since at least 1960. For example, data from the U.S. Centers
for Medicare and Medicaid Services (CMS) indicate double-digit
annual increases in premiums for private health plans during
the years 2001-2003, which significantly increased the overall
share of business and household expenditures devoted to medical
services. As Jones (2005) and others have argued, the rapid increase
in the price of medical care likely is demand-driven to a large
degree, reflecting the high value that consumers in wealthy countries
assign to medical technologies that improve the quality of life
and extend its duration.
A potential flipside to rising health-care costs,
however, is declining health-care coverage. As documented in
a recent report from the U.S. Census Bureau (DeNavas-Walt et
al. 2006), the percentage of uninsured Americans rose in 2005,
continuing a trend that started around 2000. The recent decline
in overall coverage reflects a longer-term trend towards reduced
coverage through employer-sponsored insurance (ESI) plans. This
dual pattern of rising prices and declining coverage suggests
that some households are opting out of health coverage as its
relative price rises. In this Economic Letter, we investigate
the trend towards declining insurance coverage, focusing on the
recent trends in ESI coverage and costs and underlying changes
in employee participation rates. In the conclusion, we use available
research results to project long-term coverage declines in response
to further cost increases.
ESI coverage, offers, and "take-up"
Each year, the U.S. Census Bureau publishes estimates
of health insurance coverage in the prior year. The estimates
are based on tabulations from a large, nationally representative
sample of households, the Annual Social and Economic Supplement
to the monthly Current Population Survey (CPS), conducted each
March. Figure 1 displays the estimates of health insurance coverage
rates for all individuals from this source for the period 1996-2005.
To enhance comparability over time, we applied an adjustment
to the data that accounts for a change in survey methodology
in 1999 (see DeNavas-Walt et al. 2006, Table C-1).
As noted in the Census report and corresponding
press coverage, the share of individuals lacking health insurance
coverage from any source rose slightly (0.3 percentage points)
between 2004 and 2005. Figure 1, which displays the rate of health
coverage for the U.S. population decomposed into ESI and other
sources (i.e., direct private purchases and government programs),
shows that this most recent coverage decline reflects the continuation
of a pattern that emerged after the year 2000. Since that year,
the percentage of uninsured individuals has risen by 1.7 percentage
points on net, representing a reduction in the number of insured
individuals of about 5 million. Figure 1 also shows that the
net decline in health coverage over this period reflects a pronounced
decline in ESI coverage that was not fully offset by increased
coverage through other sources (such as public programs). In
particular, over the period displayed, ESI coverage fell from
63.6% in 2000 down to 59.5% in 2005; the drop in ESI coverage
was evident for all age groups except individuals aged 55 and
over. Coverage through direct private purchases also fell slightly
over this period, reinforcing the decline in ESI. Coverage through
government programs rose about 2½ percentage points over the
same period, not enough to offset the decline in ESI and other
private sources of coverage.
 The data displayed in Figure 1 suggest that ESI
coverage declines have been the driving force for overall coverage
trends in recent years. The Census data used in Figure 1 provide
information on ESI coverage rates but do not indicate the extent
to which the changes have been due to reduced availability of
insurance plans from employers (ESI "offers"), tighter
eligibility requirements for individual employees, or reduced
employee participation in available plans (the latter two factors
determine employee "take-up" of offered plans). Identifying
these underlying sources of declining coverage is important for
understanding the economic reasons for the trend. Information
on offers, eligibility, and participation is available from an
alternative, employer-based survey conducted by the U.S. Agency
for Healthcare Research and Quality, the Insurance Component
of the Medical Expenditure Panel Survey (MEPS-IC; www.meps.ahrq.gov).
Since 1996, this survey has been administered yearly to a nationally
representative sample of about 40,000 private business establishments,
plus 2,500-3,000 state and local government units; data currently
are available through 2004. Due to limited availability of key
series for the government sample, our MEPS tabulations are based
on the sample of private sector establishments.
Figure 2 displays the percentage of workers employed
by firms that offer ESI for the  years 1996-2004, decomposed into
the percentage of workers who are ineligible for or decline offered
coverage and those who accept ("covered"). The overall
coverage rates vary from a high of 60.1% in 1996 down to 54.3%
in 2004. (Note that these figures are not directly comparable
to the ESI coverage rates from Figure 1, due to differences in
the base sample and the inclusion of coverage through the ESI
plan of a family member in Figure 1.) The figure shows that the
tendency for employers to offer health insurance has been relatively
constant, varying within a narrow band of about 87%-89%. By contrast,
the share of workers who are ineligible for coverage or decline
coverage that is offered to them rose from 26.4% in 1996 to 33.6%
in 2001 and then stayed near that elevated level in subsequent
years, ending at 32.4% in 2004. Although Figure 2 does not distinguish
between employees who are ineligible for coverage offered by
their employers and those who decline offered coverage, about
one-third of the decline in take-up is due to declining eligibility
and about two-thirds is due to declining participation. This
suggests that most of the decline in take-up has been due to
employee decisions, although some has been due to the imposition
of tighter eligibility requirements by employers (longer waiting
periods, more extensive health screening prior to receiving coverage,
etc.).
Rising employee costs
 Declining employee participation in ESI programs
may relate to rising costs. Figure 3 displays the trend in the
costs of ESI coverage (average premiums per enrolled employee,
excluding family plans), tabulated from the MEPS-IC sample of
private establishments for the period 1996-2004. The figure decomposes
the total costs into the typical portion paid by employers and
that paid by employees. Employers bear most of the direct cost
burden of ESI coverage, and the share paid by employees has been
relatively constant at about 17% over this period. At the same
time, total premium costs have increased substantially, approximately
doubling the direct premium contributions of firms and their
workers between 1996 and 2004. Additional tabulations (not shown)
reveal that the share paid by employees is higher at firms that
employ relatively more low-wage workers (about 21% for low-wage
firms, about 16% for high-wage firms); this increases the burden
of rising costs for workers whose ability to pay is already constrained.
Although we do not display ESI cost figures for family coverage
plans, the patterns are similar to those for single coverage,
with a higher but relatively constant share paid by employees
(about 25%) and an approximate doubling in total premium costs
between 1996 and 2004. These figures on ESI premiums may understate
the full extent of increases in medical care costs for participating
employees. In particular, for many ESI plans, deductibles and
copayment amounts have increased along with premiums, further
increasing out-of-pocket costs to plan participants (Gabel et
al. 2002); however, in recent years these cost increases probably
have been offset somewhat by the tax advantages conferred through
medical savings accounts.
As noted above (Figure 2), most of the drop in
coverage has occurred because employees are increasingly declining
coverage that is offered to them, suggesting that cost increases
are directly affecting employees' participation decisions. This
view is supported by recent research findings that use formal
statistical analysis to investigate the link between rising costs
and declining coverage. For example, Kronick and Gilmer (2005)
found that most of the decline in ESI coverage between 1987 and
2002 is attributable to declining affordability (i.e., more rapid
growth in premiums than in personal income); Chernew et al. (2005)
also found that rising health insurance costs are the dominant
explanation for falling coverage over time.
Looking ahead
Based on CMS projections, Kronick and Gilmer
(2005) estimate that health-care costs will outstrip income gains
by 2.8 percentage points annually during the years 2002 through
2013. Given the research findings of systematic links between
rising costs and declining ESI coverage, it is likely that this
will lead to further coverage declines. Kronick and Gilmer predicted
that ESI coverage (for nonelderly workers) will decline by four
percentage points between 2002 and 2013; the data displayed in
Figure 1 suggest that about one-half of this total decline (1.8
percentage points for the total population) had already occurred
by 2005. Looking further ahead, Jones (2005) predicted that the
share of health-care spending in GDP may rise to 25%-35% by 2050
(from 16.0% in 2004). The midpoint of this estimate (30%) is
consistent with growth in the medical spending share of GDP at
roughly half the pace assumed by Kronick and Gilmer for the years
2002-2013. However, even with this slower pace of growth in relative
health spending, the implied decline in ESI coverage is 7.1 percentage
points, reducing the coverage rate from its 2005 level of 59.5%
(Figure 1) to 52.4% in 2050. On the current population base of
300 million, this implies about a 21-million person increase
in the uninsured population, absent offsets from other sources
of insurance.
The determinants of these trends may change over
time, limiting the realized decline in ESI coverage. However,
our rough calculations provide a sense of the extent of potential
coverage declines. The corresponding policy implications are
important: declining ESI coverage increases the cost burden on
government insurance programs. Thus, while the work of Jones
(2005) and others suggests that increased health spending is
demand-driven, hence worthwhile in terms of economic efficiency,
the potential impact on the extent of coverage may pose difficult
choices for households and policymakers going forward.
Tom Buchmueller
Professor, The Ross School of Business,
University of Michigan,
and Visiting Scholar, FRBSF
Rob Valletta
Research Advisor
References
[URLs accessed September 2006.]
Chernew, Michael, David M. Cutler, and Patricia
Seliger Keenan. 2005. "Increasing Health Insurance Costs
and the Decline in Insurance Coverage." Health Services
Research 40(4), pp. 1021-1039.
DeNavas-Walt, Carmen, Bernadette D. Proctor,
and Cheryl Hill Lee. 2006. "Income, Poverty, and Health
Insurance Coverage in the United States: 2005." U.S. Census
Bureau, Current Population Reports P60-231. Washington, DC: U.S.
Government Printing Office.
Gabel, Jon, et al. 2002. "Job-Based Health
Benefits in 2002: Some Important Trends." Health Affairs 21(5),
pp. 143-151.
Jones, Charles I. 2005. "More
Life vs. More Goods: Explaining Rising Health Expenditures." FRBSF
Economic Letter 2005-10 (May 27).
Kronick, Richard, and Todd Gilmer. 2005. "It's
the Premiums, Stupid: Projections of the Uninsured through 2013." Health
Affairs Web Exclusive, April 5.
Opinions expressed in this newsletter
do not necessarily reflect the views of the management
of the Federal Reserve Bank of San Francisco or of the
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