Subsidies May be Undermined by Surging Health Care Costs

Unless health care costs come down, workers and employers will continue to pay more of their wages and profits to health insurance.

February 24, 2010

While low-wage workers could benefit if subsidies to purchase coverage are included in any national health reform legislation, there’s a limit to how much the federal government is willing to subsidize the cost of health care. Unless health care costs come down, workers and employers will continue to pay more of their wages and profits to health insurance.

A breakdown of how federal health care reform subsidies would affect workers illustrates how rising health care costs could spell long-term trouble for low-wage workers like Mirlene Desrosiers and Sandra Broughey. Home health care aides make $12 to $15 an hour. Broughey says she makes $14.25 an hour and hasn’t had a raise in three years.

Under the Senate bill that passed in December and which is considered a politically viable starting point if negotiations on health care reform continue, families and individuals who are offered employer-sponsored health care would be eligible for subsidies if their income is below 400 percent of the poverty level and their premiums exceed 9.8 percent of their income—$88,200 for a family of four in 2009.

According to a Congressional Budget Office and Joint Committee on Taxation estimate of the Senate bill, in 2016 a family premium with an actuarial value of 70 percent (meaning an employer or insurer pays for 70 percent of the cost) will cost an average of $14,100.

What’s important to understand when it comes to the proposed subsidies is that a family’s income determines the percentage of the premium it is responsible for paying. Therefore, in 2016 a family of four making $42,000 would be required to pay 17 percent of the premium, or $2,400. A family of four earning $54,000, meanwhile, would be required to pay 28 percent of that premium, or about $4,000 a year. That amounts to more than 7 percent of that family’s income.

But if health care costs go up faster than wages, as they have historically, the portion of a family’s income that goes toward health care costs will also increase. In the last decade, premiums rose 131 percent, while the typical American household’s income fell. According to the Census Bureau, median household income fell to $50,303 in 2008 from $51,295 in 1998, when adjusted for inflation.

This trend spells trouble for families. If premiums rise at the same rate in the next decade as they have in the last one, a family premium that costs $15,000 in 2016 would cost $32,571 by 2026. A family of four responsible for 28 percent of the premium in 2016 would still be responsible for 28 percent of the premium in 2026. That means they would have to pay $9,119 for health insurance coverage. Unless wages grow faster than health care costs, more families will spend a greater percentage of their income on health care.

“As premiums grow over time, what you are paying as a share of your income grows over time,” says Sara Collins, assistant vice president at the Commonwealth Fund, a health care policy organization in New York. “This underscores the need to lower the cost trajectory for individuals and the federal government.”

Unless health care costs come down drastically or wages increase just as dramatically, more families will spend more of their income on health care. Workers like Desrosiers and Broughey will be back where they started: working to pay for health care.

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