FRBSF Economic Letter
2006-25 | September 29, 2006
Health Insurance Costs and Declining Coverage
As discussed in a recent (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.
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.
Figure 2 displays the percentage of workers employed by firms that offer ESI for the
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.
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.
Professor, The Ross School of Business, University of Michigan,
and Visiting Scholar, FRBSF
[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.
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