How Health Care Costs Contribute to Income Disparity in the United States

How health care costs contribute to income disparity in the United States Recent trends in health care costs, health care coverage, and household income have contributed to growing disparities between different income groups in the United States. Byron G. Auguste, Martha Laboissière, and Lenny T. Mendonca MA RCH 2 0 0 9 m c k i n s e y g l o b a l i n s t i t u t e 1 Over the past 50 years, US workers have come to expect employers to pay for some part of employee health insur
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  How health care costscontribute to income disparity in the United States Recent trends in health care costs, health care coverage, andhousehold income have contributed to growing disparities betweendifferent income groups in the United States. Byron G. Auguste, Martha Laboissière,and Lenny T. Mendonca MARCH 20 0 9 mckinsey    global   institute  1 Over the past 50 years, US workers have come to expect employers to pay for some partof employee health insurance; many consider this an important part of overall compensation.However, recent economic trends have resulted in a growing disparity in health care coverage and affordability. A study by the McKinsey Global Institute (MGI) identied three divergent categories of workers that are emerging from trends in health care coverage and income growth.The top-income category (earning on average $210,100 annually  1 ) has enjoyed rising incomes and growing employer-paid health care benets, which have made their out-of-pocket spending on health care a relatively small and affordable portion of total spending. The higher-middle-income category (earning an average of $84,800 annually) and the lower-middle-income group (earning on average $41,500), have also seen increasing benets and incomes—but at a much slower rate, making the uncovered portion of their health care costs ever-more expensive. In the bottom-income category (earning an average of $14,800 a year), incomes have been stagnant, and their employers are less likely to pay for their health insurance. This group is nding any health care difcult, if not impossible, to afford.  As part of a study of widening income gaps between US households, we found that risingemployer-paid health insurance premiums constitute a growing share of the combined income of lower-paid employees—a much larger share than for those who are higher paid. For those  workers within the bottom-income group who are insured (22 percent), the ratio of employer-paid premiums to household income is 20 percent. That compares with 3.3 percent for the top-income group, in which nine out of ten workers are insured (Exhibit 1). Exhibit 1 Wide gaps   US householdannual-income group, (unadjusted forhousehold size) Average acrossincome groupsEmployer-paid healthinsurance contributions toUS household income, 2  average, %  Analysis done for years comparable to available detailed household Current Population Survey (CPS) data.  Includes both public- and private-sector employees.Source: Current Population Survey , DataFerrett; US Bureau of Labor Statistics; Medical Expenditure Panel Survey;  Health Care for America Survey , American Federation of Labor and Congress of Industrial Organizations, Mar ;  McKinsey Global Institute analysis < $27,30013.920.0$27,300–$58,0007.09.7$58,000–$130,0004.66.3> $130,2002005 = 9.81996 = 19962005 1 1  All average incomes are or 2005. The top-income group represents 10 percent o all households; the higher-middle-, lower-middle-, and bottom-income levels each make up 30 percent o the remainder.  In addition, different income groups now experience strikingly different levels of health care coverage and benets. Rising health care costs, reected by spiraling insurance premiums, are  widening the discrepancies between income groups in both the levels of enrollment in employer-paid health schemes and insured workers’ ability to afford premiums and out-of-pocket healthcare costs.The latest available data, from 1996 to 2005, 2 shows that the average employer contributionsto health insurance premiums grew 5 percent a year in real terms, to $5,068. Some employers are offering more comprehensive benets to attract and retain better workers. At the same time,some companies have been prompted to withdraw the offer of employee health care benetsaltogether; others have had to limit the number of employees eligible for benets (for example,  by including only full-time workers or those of a certain tenure). Employee contributions toinsurance premiums have also been rising, discouraging some from taking up their employers’insurance offers altogether.Such responses to rising premiums have resulted in stagnating or falling rates of enrollment in employer-paid schemes—a trend that has particularly affected middle-income employees. Put another way, employers are spending more on health care per employee but for fewer employees. In 2005, employer-paid health benets covered 22 percent of households in the bottom-income group, contrasted with 56 percent of the lower-middle, 81 percent of the upper-middle, and89 percent of the top income group (Exhibit 2). 2 Exhibit 2 Premiums onthe rise   Household annual-income group (unadjusted for household size)PolicyholderDependentNot coveredby employerUS population, 2005, 1 % Analysis done for years comparable to available detailed household Current Population Survey (CPS) data.  Provided through current or former employer or union.  Figures do not sum to %, because of rounding.Source: Current Population Survey , DataFerrett; McKinsey Global Institute analysis < $27,30078157$27,300–$58,000 3 433125$58,000–$130,200193843> $130,200113950 Employer-providedhealth plan 2 2  Analysis done or years comparable to available detailed household Current Population Survey  (CPS) data.   What’s more, because incomes across the four groups of workers have been growing at suchdifferent rates in recent years, the average employer-paid premium for a worker in the top10 percent was more than double the average for someone in the lowest 30 percent of incomeearners. Gaps in the extent of employer-paid health care services offered to employees at different income levels have thus widened. Employees beneting from higher premiums receive a proportionately wider choice of health care goods and services. Q Byron Auguste is a director in McKinsey’s Washington, DC, ofce; Lenny Mendonca is director o theMcKinsey Global Institute, where Martha Laboissière is a consultant. The authors wish to acknowledge Sara Parker or her extensive contribution to the research and article. They would also liketo acknowledge Alexander Grunewald, James Kalamas, and Robin Matthias or their insightul input.Copyright © 2009 McKinsey & Company. All rights reserved. Related articles   “Why Americans paymore or health care”“Three imperatives orimproving US health”“Linking employeebenefts totalent management” 3
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