Passing health care costs to employees

Over the last 50 years, health care spending grew at an average annual rate of nearly 5 percent in real terms, far surpassing the growth in income. High and rising health insurance costs are an important driver of federal and state budgets, private sector compensation costs, and also a top concern of families. Reigning in health costs was a prime motivation behind the Affordable Care Act and is also an important factor behind many state policy proposals, including those to reform Medicaid, Workers Compensation, and collective bargaining rules for state employees. At the same time as health insurance premiums have rapidly increased, average monetary pay for employees has remained flat. Economists have long recognized that these two trends may be related. Firms typically require that employees pay some fraction of the cost of their health insurance directly through payroll deduction. But employees may effectively pay for more of their insurance than this because year-to-year salary adjustments may depend on the growth in health insurance costs. As health insurance costs go up, firms may offer, and employees may be willing to accept, slower wage growth if it means employees can keep their health insurance benefits at a constant level. A prominent view among economists, in fact, is that all employer-provided health insurance costs are passed on to employees in one form or the other.
Understanding the relationship between health insurance costs and take-home salaries is important for interpreting the long-term trajectory of salaries. It is also important for understanding the true consequences of policies that seek to reduce the cost of health insurance. For example, if all health insurance costs are ultimately paid by employees through some combination of payroll deductions and salary adjustments, then policies to reduce the cost of health insurance ultimately have no effect on employment costs and only affect the mix of monetary pay and health insurance in total compensation.IGPA Expert Darren Lubotsky, an economist at the University of Illinois at Chicago, and co-author Craig A. Olson, a professor in the School of Labor and Employment Relations at the University of Illinois at Urbana Champaign, used unique data to measure the trade-off between salary and health insurance costs among public school teachers in Illinois over two decades. Studying the trade-off in the context of public school teachers is especially interesting because of the ongoing debate here over public sector employment costs. Are increasing health care costs really being passed on to employees? If so, could taxpayers save money by reducing the cost of health insurance for public employees?