The Changing Face of U.S. Health Care: What the Current Reform Momentum Means for Labor Markets

Health-care reform was a major issue during the 1992 presidential campaign, following four years of double-digit health insurance premium growth. Reform efforts failed, however, leaving U.S. health-care markets essentially unchanged. At that time, the public ranked health-care reform well below the economy and just slightly higher than the deficit in importance. Recently, the issue has resurfaced in the aftermath of another period of rapid escalation in health insurance premiums. In 1992, health insurance made up 6.3% of employee compensation for private industry employers. In September 2007, health benefits constituted the largest portion of employer provided benefits—7.1% of total compensation. Contrary to popular belief, health insurance makes up the largest share of compensation for employers with more than 500 employees, at 7.9%, relative to 5.8% for employers with 50 or fewer employees.

In response to accelerating costs, employers worked to pass through health premium escalation to employees.

Employer contributions to health insurance premium growth peaked in 2000. While contributions continue to grow, employers have worked to increase the share of health insurance costs paid by employees and discourage service utilization via higher co-payments for doctor visits and pharmaceuticals. With this escalation in both employer and employee costs, the public has called for reform.

Indeed, in contrast to 1992, an ongoing national AP poll now finds that more than half of voters consider health care, like the economy, "extremely important." According to a December 2007 Kaiser poll, the public now ranks health care as second only to Iraq as issues presidential candidates should address; in exit polls from last night's New Hampshire primary, voters ranked Iraq below the economy and health care in importance. Clearly, health care has risen to the forefront of policy debates since 1992.

Rising health costs both to employers and employees, coupled with an economy poised on the edge of a recession, is breeding fear among many taxpayers that they may not be able to financially cover health-care needs in the future. Kaiser's December poll reveals that nearly half the public (45%) are concerned about rising out-of-pocket costs more than any other issue related to health-care costs. Respondents close to retirement rank health-care costs as even more important than their younger counterparts. This demographic is bulging as baby boomers approach retirement age.

The change in public perception regarding health care has created a whirlwind of momentum around reform. Currently, more than two-thirds of American voters favor universal health-care coverage, but only 54% favor a taxpayer-financed government plan. In response to shifting attitudes, the major presidential primary players have fashioned health-care platforms, generally along party lines.

Policy Proposals

Most Republican candidates' platforms rely on market forces and tax incentives to reduce costs and improve the quality and efficiency of health care. These policies shy away from government intervention or any expansions in public coverage. National competition among health insurance providers is encouraged in an effort to reduce health insurance costs to both employers and individuals. State control is a central tenet of many plans. Reduced utilization of health services is also a goal for cost containment, typically through preventive care. Governmental costs of these policies have not been explicitly specified. Individual plans vary somewhat outside of these common tenets: Guiliani calls for tax changes to shift millions from employer-based insurance to individual insurance. Huckabee's plan requires participants to pay more out-of-pocket to limit the use of services.

Democratic candidates are emphasizing full coverage via expanded private and public insurance. In many of the Democratic proposals, employers are required to finance insurance for employees or contribute to the public program. However, requirements vary and tax incentives or exemptions for small businesses are included. As well, candidates include provisions for attracting workers to the chronically undersupplied nursing and home-health-care fields. Governmental costs for these policies range between $50 billion per year to $120 billion (when fully implemented), and rely on rolling back tax cuts for those with incomes over $200,000–250,000 per year.

Demand and Supply in Health-Care Labor Markets

Changing demographics and great strides in health-care technology have stimulated what seems to be an ever-growing demand for health products and services. There are two major demographic factors affecting the demand for health-care services in the United States: the aging population and rising rates of obesity.

The aging population will have a significant impact on the future of the U.S. health-care industry. The elderly are the most high-cost demographic group in terms of physician visits, in-patient care stays, and pharmaceutical treatment. In 2007, life expectancy at birth in the United States increased to 77.9 years. By 2030, the population of persons older than 65 years will almost have doubled from its total size in 2000, reaching 71.8 million. The aging population will create huge problems for the Medicare program, as it attempts to fund services for 22% of the population. In line with the aging population, employment in home health care is expected to grow in the coming years. Global Insight expects employment in home health care to climb by 3.6% in 2007, and a further 3.3% in 2008.

According to the latest data available from the Centers for Disease Control and Prevention, 30% of adults 20 years of age and older (or 60 million people) are clinically obese. Such high rates of obesity are leading to high incidences of cardiovascular diseases, back pain, and diabetes prevalence, providing additional impetus to health-care cost growth as a result. This is reflected in strong employment growth in the health-care and social-assistance industry over the last year, even as total employment flags. Even in December's dismal jobs report, health-care and social-assistance payrolls jumped 36,900 over November. In 2007, the sector added 478,400 jobs, a 3.2% increase over December 2006, in an industry that makes up close to 12% of nonfarm payrolls.

The health-care industry is labor intensive; given the above-average growth for the industry, hospitals and other health-care facilities have struggled against a short supply of technical workers. Generally, severe labor shortages cycle through the industry every decade (the last one occurred in the early 2000s). Therefore, these facilities paid above-average wages not only to attract but also to retain workers. Tight labor markets in the health-care industry have led to greater-than-average escalation in health-care workers' compensation. Compensation for civilian health-care service workers has outpaced compensation for all civilian workers since 2001, by an average of 0.4 percentage point annually.

Policies designed to improve working conditions for health-care employees to attract more workers may push compensation escalation slightly higher than expected in the coming years. Currently, Global Insight expects compensation for health-care and social-assistance workers to come more in line with compensation growth for all workers in the near term. Policies designed to discourage health service utilization could dampen demand somewhat, alleviating wage pressures and allowing for a slight deceleration of compensation growth. Policies designed to stimulate the supply of skilled workers could also ease labor market pressures.