Business, households, and governments: health spending, 1991

Health Care Financing Review, Spring, 1993 by Cathy A. Cowan, Patricia A. McDonnell

INTRODUCTION

In 1991, expenditures for health services and supplies (HSS) reached $728.6 billion, an increase of 11.7 percent from the previous year (Letsch et al., 1992). In this article, the traditional way of looking at health spending, concentrating on services and sources of funds, is rearranged to take one step back to see who sponsors the payment of health care bills. Expenditures for HSS, estimates of current year spending on health care, are broken down into the payer categories of business, households, governments, and nonpatient revenues. (HSS is a subset of national health expenditures and excludes research and construction which are considered investments in future health care.) Spending by these payer categories are examined over time, and measures of the changing burden this spending imposes are presented. We also explore the role of employers in private business and government as they provide private health insurance for their workers, and examine several private and public surveys conducted to measure premiums and other characteristics of employer-sponsored insurance.

The designations of who pays for and bears the burden of health care are somewhat arbitrary. Ultimately, the individual bears the primary responsibility of paying for health care through health insurance premiums, out-of-pocket costs, philanthropic contributions to health organizations, income tax and other taxes, earnings reduced by increases in employers health insurance costs, higher costs of products, and decreased dividends to owners.

In 1991, $728.6 billion was spent on health services and supplies (Table 1). The private sector, which includes business, households, and non-patient revenues, accounted for65 percent ($474.1 billion) of HSS. The public sector accounted for the remaining 35 percent ($254.5 billion). Expenditures by the public sector include only general revenue expenditure by Federal, State, and local governments on health care programs, and for governments' employer contributions to health insurance plans, and to the Medicare hospital insurance trust fund for their employees.

BUSINESS

Private business spent $205.4 billion on health care for employees in 1991. This constitutes a 9.3-percent increase in expenditures from 1990. Private business expenditures include employer contributions to private health insurance premiums ($152,7 billion) and to the Medicare hospital insurance trust fund ($32.8 billion). These expenditures also include the costs absorbed by business for the medical portion of both workers' compensation and temporary disability insurance ($17.5 billion), and for industrial inplant health services ($2.4billion) (Table2).

The share that business paid for health care changed from 1965 to the present. In 1965, private business accounted for 16 percent of HSS. By 1981, the percentage paid by business had grown to 28 percent. The share of health care costs paid by business remained fairly constant from 1981 to 1991.

The share or amount that business pays for health care can be examined in the context of the burden that business bears in paying for these costs. Burden can be measured in several different ways. One way is to compare business health spending with profits, either before or after taxes. Business health spending estimates cover expenditures by all types of business, such as corporations, partnerships, and sole proprietorships. However, only corporate profits are used to measure business profits because a similar concept is not available for partnerships and sole proprietorships. As shown in Table 3. in 1965 business spending for health equaled 7.6 percent of corporate profits before taxes. By 1991, this percentage had increased eightfold to 61.8 percent. The comparison of business expenditures for health care with corporate profits after taxes showed the same type of increase, from 12.4 percent in 1965 to 97.5 percent in 1991.

Business health spending as a percentage of total compensation quadrupled from 1965 to 1991, 1.8 percent to 7.6 percent (Table 3). Health care costs also accounted for more and more of fringe benefits. In 1965, health care costs consumed 20.5 percent of fringe benefits. By 1991, this percentage had doubled to 48.6 percent, almost one-half of total fringe benefits.

Business was able to transfer some of its burden of rising health care costs to employees (U.S. Congressional Budget Office, 1992). When health care costs rise, employers can counterbalance the increase by lowering wage growth, or lowering other fringe benefits such as pension plans and other supplements to wages. Growth in health care costs also can be slowed by increasing employee premium contributions, increasing copayments and deductibles, and decreasing benefits or dropping them altogether. Other options available to business include the substitution of capital costs (equipment) for labor costs (total compensation). In aggregate, this lowers the number of employees per unit of output and increases productivity per worker, permitting employers to reduce their work force (and total compensation). This change in mix between capital and labor costs may be manifesting itself subtly by a loss of manufacturing industry jobs with higher wages and fringe benefits, with a growth in service industry jobs, and with lower wages and fringe benefits (Levit, Olin, and Letsch, 1992).