News Release
 

July 31, 2009

CONTACT: Marc Kaplan
(215) 662-2560
marc.kaplan@uphs.upenn.edu

Penn Medicine - University of Pennsylvania School of Medicine and University of Pennsylvania Health System

Post-Recession Incomes Will Be Hit Hard by Health Care Spending for Middle Class Working Families, Penn Analysis Shows

PHILADELPHIA – In a post-recession America, even though as a nation income levels may rise, middle class families still won’t be shielded from the crushing burden of health care costs and will watch their standards of living continue to erode, according to a study published this week in the New England Journal of Medicine (NEJM) by Daniel Polsky, Ph.D., and David Grande, M.D., M.P.A, of the University of Pennsylvania’s Leonard Davis Institute of Health Economics.

Using a series of vignettes premised on typical health care 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 health care.  As health care swallows a larger proportion of their family budget, standards of living will decline.

“For many families, one inevitable solution will be dropping private health insurance coverage altogether,” write the authors.

In other words, even when the economy turns the corner, the problem of health care won’t go away.

The authors emphasize that the key to affordable health care for all is decisive action to contain health care costs. However the authors caution that for health care reform based on private health insurance to be genuinely affordable, it will also require shifts in the distribution of health care costs within the population.

The piece, "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 health care spending, suggesting that health care 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 health care 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. (The lay perspective typically sees employer premiums as a contribution from employers toward the cost of health care 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 decreases.  In other words, middle-income families pay a larger percentage of their income in the form of health care premiums and forgo a larger percentage of what would have been direct income to themselves compared to upper-income families.

For example,  health care expenditures, which represent 25 percent of a two-income family’s total $48,000 compensation, consist of employee-paid premiums and out-of pocket expenses (8.6 percent) and health care 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 percent). In the case of a family with a combined income of $97,000, health care accounts for 16.7 percent of the compensation, with employee-paid premiums and out-of pocket expenses totaling 6.4 percent and employer contributions and taxes totaling 12.2 percent.

Finally, at the $175,000 level, health care accounts for 13.9 percent of a family’s compensation — with 2.6 percent 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 health care expenditures have grown at a rate of three percent, income has been growing at a slower rate for middle income families: 0.6 percent for the $48,000 household, one percent for the $97,000 household, and 1.5 percent 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 non-health-care goods and services than lower-income families.

According to Dr. Polsky, “Growth in employers’ contributions toward health insurance premiums translates into slower growth in wages than would otherwise have occurred. Because this fact is not apparent to most families, the health care reform proposals that aim to control costs do not receive the level of support they deserve.”

Dr. Grande notes: “The growth in the rate of spending on health care hits the household finances of middle-class workers harder because health care makes up a larger proportion of their budget. Progressive taxation could simultaneously address the regressive nature of health care cost growth and provide financing for health care reform.”

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Penn Medicine is one of the world's leading academic medical centers, dedicated to the related missions of medical education, biomedical research, and excellence in patient care. Penn Medicine consists of the Raymond and Ruth Perelman School of Medicine at the University of Pennsylvania (founded in 1765 as the nation's first medical school) and the University of Pennsylvania Health System, which together form a $4.3 billion enterprise.

The Perelman School of Medicine has been ranked among the top five medical schools in the United States for the past 17 years, according to U.S. News & World Report's survey of research-oriented medical schools. The School is consistently among the nation's top recipients of funding from the National Institutes of Health, with $392 million awarded in the 2013 fiscal year.

The University of Pennsylvania Health System's patient care facilities include: The Hospital of the University of Pennsylvania -- recognized as one of the nation's top "Honor Roll" hospitals by U.S. News & World Report; Penn Presbyterian Medical Center; Chester County Hospital; Penn Wissahickon Hospice; and Pennsylvania Hospital -- the nation's first hospital, founded in 1751. Additional affiliated inpatient care facilities and services throughout the Philadelphia region include Chestnut Hill Hospital and Good Shepherd Penn Partners, a partnership between Good Shepherd Rehabilitation Network and Penn Medicine.

Penn Medicine is committed to improving lives and health through a variety of community-based programs and activities. In fiscal year 2013, Penn Medicine provided $814 million to benefit our community.


This release is available online at
http://www.uphs.upenn.edu/news/News_Releases/2009/07/health-care-costs/