Employer-Sponsored Health Care Costs Look Stable – Center for Retirement Research

Good news for wages and the Social Security tax base, but will costs stay low?

Health care costs are a large and growing part of a country’s GDP. Another way those costs enter the general economy is through the employer’s contribution to employer-sponsored health insurance (ESHI). Economists generally assume that the cost of employer benefits – in this case health insurance – is passed on to the worker, leading to slower wage growth and thus an erosion of the Social Security wage base. Both of these effects were evident in the decades before 2005, as ESHI increased as part of compensation. Fortunately, the rate of ESHI contributions to compensation increased significantly after 2005, stabilizing wages and halting the erosion of the share of workers’ compensation under the Social Security tax base (see Figure 1).

The question is whether the stabilization of employer contributions as part of compensation is temporary or permanent. To answer that question my co-authors and I decided to determine why ESHI contributions increased as a share of compensation before 2005 and why this rate has stabilized in recent years. We then use these findings to make possible estimates of ESHI and compensation over the next decade.

The literature identifies three major factors that drive ESHI costs as a share of compensation:

  • National Health Expenditure: General trends in health care spending are, not surprisingly, significant. These costs rose from about 13 percent of GDP in the mid-1990s to about 17 percent of GDP in 2009, and continued to rise at this rate until 2019.
  • Stakeholder Composition: Since health insurance costs as a percentage of compensation are higher for low-wage earners than for high-wage earners, a decrease in low-wage participation reduces an employer’s total share of ESHI costs in compensation.
  • Family vs. Individual provision: Family plans are more expensive than individual plans, and their costs have grown at a faster rate. To the extent that family programs are reduced as part of overall programs, the costs associated with compensation will decrease.

Using data from the Department of Health and Human Services’ Medical Expenditure Panel Study (MEPS), our analysis showed that the growth of national health expenditures was, in fact, the main driver of the ESHI-to-compensation ratio before and after 2005. However, after 2005, this effect was largely offset by a decline in participation. among low-income earners and declining demand for family planning.

Looking ahead, the Centers for Medicare & Medicaid Services projects that national health care costs as a percentage of GDP will increase from 17.6 percent in 2019 to 19.6 percent in 2031. If nothing else changes, ESHI as a compensation component will grow again. But, if the participation of ESHI and the need for family programs decreases as it has in recent years, these two factors should reduce the growth of health care costs and the ratio of ESHI and compensation should remain stable (see Figure 2).

Line graph showing historical and projected ESHI costs as a share of compensation under alternative scenarios, 1996-2031

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