Report: Rising Health Care Costs Contribute to Income Inequality

Health care costs have largest effect on working and middle class, report finds

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June 14, 2016

Rising health care costs are contributing to the growth of income inequality, according to a report from the Mercatus Center.

"Most employers pay workers a combination of earnings and benefits, which include retirement plans and health insurance coverage," the report said. "If benefits become more expensive, earnings growth will suffer."

The group, using data from the Bureau of Labor Statistics, concluded that employer-provided health care benefits have grown much more rapidly than earnings, which has led to rising inequality.

The bureau’s data shows that from 1999 to 2006 the cost of employer health insurance coverage for low-wage workers rose from 6.2 percent to 12.2 percent, an increase of almost 97 percent. During that same period, wages for this group rose by only 28 percent.

For the top one percent of earners, health care costs grew from 4.0 percent to 4.3 percent from 1999 to 2006. "Because healthcare is a smaller share of total compensation for top earners, their earnings grew nearly as quickly as their compensation—35 percent for earnings and 36 percent for total compensation—and faster than earnings grew in the lower earnings percentiles."

"Though rising healthcare costs eat away at wage growth for everyone, the effects will be largest for the working and middle class because their healthcare costs are so large relative to the rest of their compensation package," the report said.

The data from 1999 through 2006 also show that wages and benefits did not become more unequal for the lowest-paid workers and the top one percent of earners during that time period. "In fact, total compensation grew more quickly for the lowest-paid workers than for the top one percent," the report stated. "But rising healthcare costs suppressed earnings growth much more for lower- and middle-class workers than for high earners, with the result that reported earnings inequality increased significantly."

The report cited a Kaiser Family Foundation survey from 2015 that found employer costs for family health care coverage increased from $4,200 in 1999 to nearly $12,600 in 2015. "Such numbers give a reasonable explanation for why average wages have stagnated in recent years," the report said. "Total compensation continued to increase, but rapidly growing healthcare costs ate away at wages and nonhealth benefits."

The group suggested that the best policy to reduce inequality was to control the rate of growth in health care costs by enforcing antitrust law in the health care sector, encouraging employers to provide more insurance options for workers, and reducing the favorable tax treatment of health care spending and insurance.

"One of the initially stated objectives of the Affordable Care Act was to reduce the rate of growth in healthcare costs," the report said. "However, after a brief pause—likely caused by the recession—the rate of increase in healthcare spending has picked up again recently, and so the Affordable Care Act does not seem to be the solution to this problem."

The Department of Health and Human Services did not respond to requests for comment.

Published under: Health Care