Rubén Hernández-Murillo

English

Research Papers in Economics

NationalEconomicTrends
November 2002
Health Care Costs and
Coverage
Most Americans receive health insurance through their
jobs. According to the Current Population Survey (CPS)
of the Census Bureau, about 67.4 percent of the working-
age population received employment-based insurance in
2001. Despite the economic boom of the 1990s, the share
of working-age persons without health insurance increased
from 15.1 percent in 1987 to 18.5 percent in 2001. Neither
job losses nor part-time employment nor changes in plan
sponsorship by small businesses seem to be the cause.
Instead, employees who decline to enroll in health insur-
ance and pay premiums account for much of this increase;
specifically, the share of employees declining health
insurance rose from 12 percent in 1988 to 15 percent in
2001.1,2
The decline in health insurance enrollment appears to
be associated with the dramatic rise in health insurance
costs during the past two decades, which reflects mostly
an increase in the underlying costs of medical care.
From 1980 to 2001, medical care prices increased 2.5
percentage points faster (at an annual rate) than overall
consumer price inflation.  Employees’ insurance costs
have increased not only because of rising medical care
costs but also because employers have shifted a larger
percentage of the costs to their workers. A survey finds
that employees’ contributions for single-person coverage
have increased from 11 percent of the total insurance
premium in 1988 to 16 percent in 2002. In 1988, employ-
ees contributed $8 toward the cost of their premium; in
2002, employees contributed $38.3 This latter amount
translates to $25.37 in 1988 dollars—a three-fold increase
in real terms.
The accompanying table decomposes the increase in
the typical employee-paid premium into the portion result-
ing from a higher total premium and the portion resulting
from the rise in the employee’s share. In real terms, about
45.6 percent of the increase in the employee premium is
due to an increase in the employee premium share.
Two explanations for the declining share of health
premium costs paid by employers are as follows. First,
employers shift more of the premium cost to employees
to encourage them to choose low-cost insurance options.
Second, because employees have different preferences
for health coverage, it is efficient for firms to substitute
higher wages for employer-paid health coverage; this
flexibility allows employees who value top-notch insur-
ance to purchase it, while other employees may pocket
the wage increase for other purchases.4
These findings imply that rising health insurance
premiums might increasingly impel workers to decline
health insurance—which, in addition to changes in eligi-
bility or employer-sponsored coverage, could further
increase the percentage of uninsured working-age persons.
—Rubén Hernández-Murillo
1Cutler, David M. “Employee Costs and the Decline in Health Insurance
Coverage.” Working Paper No. 9036, National Bureau of Economic Research,
July 2002.
2The author does not distiguish, however, how many employees who decline
insurance are covered by a spouse or have other alternatives.
32002 Employer Health Benefits Survey, The Kaiser Family Foundation.
4Gruber, Jonathan and McKnight, Robin. “Why Did Employee Health
Insurance Contributions Rise?” Working Paper No. 8878, National Bureau of
Economic Research, April 2002.
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
research.stlouisfed.org
Cost of Single-Person Health Insurance Coverage for a
Typical Employee
Employee 
Employee Total Employee  premium  in
premium share* premium premium* 1988 dollars
1988 11% $72.73 $8.00 $8.00
2002 16% $237.50 $38.00 $25.37
Current Constant 
Source of increase dollars dollars
Total premium cost $18.12 $9.44
Employee share rise $11.88 $7.93
Total change $30.00 $17.37
NOTE: CPI inflation computed between Dec. 1988 and Sep. 2002.
*SOURCE: 2002 Employee Health Benefits Survey, The Kaiser Family
Foundation.

Health care costs and coverage

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