Study: Rising healthcare costs lead to income inequality

A report from the Mercatus Center found that rising healthcare costs are a contributing factor to growth in income inequality.

“Most employers pay workers a combination of earnings and benefits, which include retirement plans and health insurance coverage,” wrote Mark J. Warshawsky, a Senior Research Fellow at the Mercatus Center of George Mason University. “If benefits become more expensive, earnings growth will suffer.”

Using data from the Bureau of Labor Statistics, the report analyzes the link between earnings inequality and rising healthcare costs. It found that employer-provided healthcare benefits have grown much more rapidly than earnings, which has led to rising inequality.

From 1999 to 2015 employer costs for family health insurance coverage increased from around $4,200 to about $12,600.  Between 1996 and 2008, inequality in total compensation did not change, yet the dollar earnings for the top one percent grew 15 percent faster than dollar earnings for the 30th percentile worker.

“Such numbers give a reasonable explanation for why average wages have stagnated in recent years,” wrote Warshawsky. “Total compensation continued to increase, but rapidly growing healthcare costs ate away at wages and nonhealth benefits.”

The increase in the income inequality is due to the rising cost of healthcare, which impacted the lower income workers more than the higher income workers due to the fact that they had more money to spend on their healthcare.

“In fact, total compensation grew more quickly for the lowest-paid workers than for the top one percent,” the report stated. “But rising healthcare costs suppressed earnings growth much more for lower- and middle-class workers than for high earners, with the result that reported earnings inequality increased significantly.”

The report concluded with a recommendation to reduce this income inequality gap by controlling the growth of healthcare costs by reducing how favorably healthcare spending and insurance are treated for tax purposes, strictly enforcing antitrust laws and increasing coverage options with more scope for workers’ sensitivity to costs.