The Output Effects of Employer-Based Health Insurance

Unlike most developed countries, individuals’ health insurance in the United States has long been provided primarily through employers. Though the percentage has been steadily declining for decades, de Navas-Walt, Proctor, and Mills (2004) find that about 60% of Americans still get health insurance through their employers. According to the Bureau of Labor Statistics (2005), health care costs represent over 7% of the average employer’s total compensation costs. Since such costs vary only with employment rather than hours worked, firms have an incentive to increase worker hours rather than employment. In fact, Cutler and Madrian (1998) found that rising health care costs accounted for up to a 3% increase in hours worked in the US during the 1980s alone. One issue that has received surprisingly little attention over the years pertains to the ultimate macroeconomic growth effects of employer-based systems. Is it possible that moving away from a system of employer-provided health insurance could increase employment and economic growth? Moreover, what are the implications for inequality? In this paper we investigate the possible macroeconomic benefits that could be generated by moving away from an employer-based system to some sort of a single-payer system. We construct a heterogeneous agent general equilibrium model where individuals differ with respect to their productivity and their employment opportunities. Each period firms make a decision as to how many workers of each type to hire, as well as a decision on hours per worker. We construct the baseline model calibrated to that of the post-war U.S. economy, and solve this model numerically. From the baseline model, an aggregate employment rate is calculated and then compared to the output from a model where health care is provided at the national level through a lump-sum tax on employers . The results of this paper could have important implications for influencing ongoing policy debates over health care reform.