Implications of the Economic Downturn on Health Care Access

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The recent economic downturn has adversely affected job security, investments and retirement accounts, and consumer spending. In October 2008, the unemployment rate was 6.5 percent, 1.7 percent higher than the unemployment rate the previous year, and 0.4 percent higher than September 2008.¹ Some predict that the unemployment rate could increase to more than 8 percent.² Increased unemployment affects consumer spending, sales and income tax revenue, and access to affordable health insurance and care. As individuals lose eligibility for employer-sponsored insurance (ESI), they may turn to the individual insurance market, gain eligibility for public insurance, such as Medicaid or State Children's Health Insurance Program (SCHIP), or become uninsured. In addition, the current economy has adversely impacted states' and the federal government's budgets. Thus, meeting the demand for public health insurance coverage may prove challenging. The weakened economy, coupled with the pervasive problem of rising health care costs, will be a complex challenge for the Obama administration to tackle in 2009.

Individual Impact
 
The rising unemployment rate and economic uncertainty may lead to changes in people's insurance coverage. Recent reports from the Census Bureau show that the number of uninsured individuals decreased in 2007 to 45.7 million people.³ Despite this decline, the number of people covered by either ESI or private insurance did not increase. In fact, both types of insurance saw declines in their overall enrollees in 2007.⁴ However, government programs saw an increase in the number of people enrolled, with Medicaid enrollees increasing by 1.3 million people.⁵ Instead of people transitioning to the private insurance market, they are increasingly relying on government programs to obtain health care.⁶ There has been considerable concern about the potential of public insurance crowding out private insurance coverage. HCFO recently funded Helen Levy, Ph.D., from the University of Michigan to look at the crowd-out phenomenon in SCHIP.⁷ Her work seeks to identify whether switching to public coverage by low-income families is beneficial by freeing up household resources that otherwise would have been allocated for out-of-pocket medical spending. The researchers will also examine how SCHIP has improved the material well-being and the categories of spending that have increased as a result for these families.  

Rising health care costs and the weakened economy may also cause employers to increase employee cost sharing or discontinue health benefits. Affordability issues in obtaining either ESI or private insurance will increasingly become a barrier for people, especially as the unemployment rate continues to rise. Even those individuals who have health insurance coverage are reporting affordability problems relating to their health care costs. Many people are delaying or not receiving their medical care to cut back on their costs. In 2007, 59 million people reported skimping on their health care due to factors such as cost and health system barriers.⁸ The economic woes are also affecting people's ability to payoff medical bills and causing an increase in medical debt. In 2007, 57 million people reported having trouble paying their medical bills and of those, 42.5 million individuals actually had some form of health insurance coverage.⁹ With such high numbers facing problems paying their medical bills, it is no surprise that people would limit or delay seeking necessary health care.

Even for those individuals who have ESI, increases in health insurance cost may result in lower wages. Brad Herring, Ph.D., of Johns Hopkins University, is currently studying how rising health care costs affect worker compensation.¹⁰ He will be looking at how increases in health care premiums are transferred to workers in the form of lower wages.

Finally, in spite of the fact that the majority of individuals get their insurance through ESI, a significant number still obtain insurance through the individual market. However, the individual market is different than large and small group health plans, with different underwriting and risk segmentation that make the market challenging for many people. The individual market has different regulatory restrictions, products, sales channels, and companies selling the products.¹¹ The overall structure of the individual market also differs in its transient nature where people are constantly entering and exiting the market, increasing the likelihood of adverse selection.¹² For more information on the individual market and its potential role in health reform, please see the HCFO report, The Individual Insurance Market: A Building Block for Reform?, and the companion policy brief. 

State Impact

A weakened economy not only impacts individuals, but also state governments, the majority of which must balance their budget each year. 13 Increased unemployment increases demand for public support while decreasing the amount of revenue raised by the state. A 1 percent increase in unemployment, for example, may result in a 3 to 4 percent decrease in state General Fund revenue.¹⁴ Moreover, a recent Kaiser Family Foundation study found that a 1 percent increase in the unemployment rate may subsequently increase Medicaid and SCHIP enrollment by 1 million individuals, resulting in a $1.4 billion increase in state Medicaid and SCHIP spending.¹⁵ In addition, a weakened economy may stymie health care reform efforts or sustainability of reform.¹⁶ 

A recent report estimates that 41 states are experiencing or will experience a budget shortfall in 2009.¹⁷ As state budgets are constrained, policymakers will be faced with difficult budgetary decisions. To finance Medicaid during periods of economic slowdowns, states have traditionally used "rainy day" funds, borrowed funds from the federal government, or implemented cost-containment measures.¹⁸ In 2003, the state of Oregon, for example, experienced a massive budget shortfall which led state administrators to reduce Medicaid expenditures by cutting benefits and increasing cost sharing. In a related HCFO study, Jeanene Smith, M.D., administrator at the Office for Oregon Health Policy and Research, examined the impact of the cost sharing and benefit reductions on former and current Oregon Health Plan (the state's Medicaid program) beneficiaries.¹⁹ The researchers found that lower income beneficiaries were more likely to drop out of the program as a result of stricter premium payment rules.²⁰ (Visit http://www.hcfo.org/files/hcfo/HCFOfindings0708.pdf for additional findings.)

Federal Impact

In addition to affecting individuals and state governments, the economic downturn will have serious implications for the federal government's financing and budget. The Congressional Budget Office (CBO) estimates that the federal deficit in 2008 will be near $407 billion dollars, a substantial increase from the deficit of $161 billion in 2007.²¹ Moreover, the passage of the Emergency Economic Stabilization Act of 2008-which is estimated to cost approximately $700 billion-will further constrain future spending. CBO also predicts that the fiscal future will depend heavily on health care costs, which continue to rise, and on the aging elderly population.²² As more and more adults age into the Medicare program, resources will continue to be squeezed. Currently, Medicare accounts for 14 percent of the total federal budget and 22 percent of national health care spending.²³ Between 2008 and 2017, Medicare spending is projected to increase by 7.5 percent annually.²⁴

The deficit and projected spending increases for Medicare are extremely important to watch because of the potential for funds that support the Medicare program to run out. Experts warn that by 2019 there will be insufficient funds in Medicare Part A trust to fully pay claims, and federal subsidies may be required.²⁵ With only 10 years remaining until the projected shortfall, many are concerned about how to make programmatic changes to sustain the program.
 
While the federal government wrestles with ensuring Medicare's future, the cry for reform of the current health care system is growing louder and louder. While health care ceased to be the top issue on voters' minds as the financial crisis gripped the United States, it is still a priority. Rising health care costs are being felt by everyone, and Americans are eager for a strategy to contain costs.²⁶ In a recent survey by the Employee Benefit Research Institute (EBRI), 51 percent of respondents said that even though there are some positive aspects of the health care system, major changes are still needed.²⁷ This high demand for reform will be difficult to achieve given the large deficit and continuing financial instability; however, it is an issue that is clearly on the public's and the Obama Administration's minds.

The following are select grants from HCFO's portfolio that address issues related to health insurance access and the economy. For other HCFO grants, see www.hcfo.net.

Title: Consequences of SCHIP for Household Well-Being
Institution: University of Michigan
Principal Investigator: Helen Levy, Ph.D.
Grant Duration: October 2008 - September 2009

The researchers will explore the consequences of State Children's Health Insurance Program (SCHIP) expansions, including "crowd out,"--the term used to describe the phenomenon of individuals dropping private health insurance coverage in response to expanded availability of public coverage. The researchers hypothesize that switching from private to public coverage reduces a family's out-of-pocket medical spending, freeing up more resources for other uses, making crowd-out a "windfall" not a "problem" for low-income families. They will address the following research questions: (1) How have expansions of SCHIP improved the material well-being of the low-income families the program is intended to assist, and (2) What categories of spending increase as a result of gaining eligibility for coverage? The objective of the proposed project is to reconsider the context for crowd-out and reframe the debate over SCHIP expansions with a renewed emphasis on the benefits rather than merely the costs of coverage expansions.

Title: Defining Affordability for the Uninsured and People with Chronic Conditions  
Institution: The Urban Institute   
Principal Investigator: Lisa H. Clemans-Cope, Ph.D./Cynthia D. Perry, Ph.D.  
Grant Duration: March 2008 - February 2009    
 
The researchers will examine affordability of health insurance. In particular, they will study how different measures of affordability affect access to health insurance for: 1) those that are currently uninsured; and 2) those that have chronic health conditions requiring persistently high health care expenditures. The researchers will use alternative measures of affordability (health care spending falling below a given standard of spending as a percent of family income) to: 1) describe the availability of affordable health insurance among the currently insured and uninsured populations; and 2) explain why take-up of health insurance varies, given affordability. The objective of this project is to provide empirical evidence of various measures of affordability to inform policy choices for increasing coverage and ensuring equitable financial burdens for those who acquire coverage.  

Title: Economic Impact of Adverse Health Events on the Uninsured Near Elderly
Institution: Northwestern University, Kellogg School of Management   
Principal Investigator: David Dranove, Ph.D.  
Grant Duration: November 2007 - October 2008   
 
The researchers will assess how insurance status affects personal wealth and earnings in the population nearing age 65 that have a heightened probability of adverse health but have not yet qualified for Medicare. Specifically, they will analyze: 1) the extent to which measurable dimensions of household wealth (e.g., total net worth, home equity, funds in retirement plans) fall after an adverse health event; 2) the extent to which individuals in the U.S. who lack health insurance suffer disproportionate losses in household wealth; 3) whether the probability of sentinel financial events, including loss of home and loss of estate, increases after an adverse health event; and 4) the extent to which the probability of a sentinel financial event is higher for individuals who lack health insurance. The objective of this study is to better understand the indirect effects of lack of insurance on individuals' overall financial well-being. 
 
Title: How Do Rising Healthcare Costs Affect Worker Compensation?
Institution: Johns Hopkins University ( Bloomberg School of Public Health)
Principal Investigator: Bradley Herring, Ph.D.
Grant Duration: November 2007 - March 2009

The researchers will measure the extent to which increases in health insurance premiums are borne by workers in the form of lower wages relative to the extent to which they are borne by employers in the form of lower profits. They will also examine whether there are significant differences in this relationship between small and large firms and between low and high income workers. Finally, they will examine the extent to which any wage offsets vary by the expected health care costs across groups of workers with different characteristics, such as age, gender, health status, and family size. The objective of the study is to better understand where the burden of rising health care costs falls, so as to develop appropriate policy incentives.

Title: Surviving the Perfect Storm: Impacts of Benefit Reductions and Increased Cost Sharing in a Medicaid Program
Institution: Office of Oregon Health Policy and Research
Principal Investigator: Jeanene Smith, M.D.
Grant Duration: June 2004 - August 2006

How have benefit reductions and increased cost sharing impacted the Oregon Health Plan (OHP)? The researchers are examining: (1) impacts on economic viability, including whether cost savings accrue to Medicaid or whether additional costs will be incurred as beneficiaries shift from one benefit to another; (2) impacts on access, including whether access and continuity of care will be compromised as a result of cost sharing and benefit reduction strategies; and (3) impacts on coverage, including the degree to which Medicaid beneficiaries leave the program due to these changes. The objective of this study is to inform state decision makers who continue to seek efficient cost-saving strategies and consider competing approaches for maintaining and rebuilding benefits following reductions in Medicaid and reshaping publicly financed health care.

Title: The Dynamics of Health Insurance Coverage: 1996 to 2000  
Institution: The Urban Institute   
Principal Investigator: Linda Blumberg, Ph.D.  
Grant Duration: September 2003 - October 2005   
 
What are the effects of certain insurance market reforms that were designed to expand coverage? Researchers at the Urban Institute examined the dynamics of health insurance for children and adults under age 65 from 1996 to 2000, a dynamic period characterized by the implementation of national welfare reform, SCHIP, and an economic boom. They documented the patterns of insurance coverage and public program eligibility, estimating the impact of the implementation of SCHIP on insurance coverage for eligible children and previously Medicaid eligible children, and assessing the extent to which the economic expansion affected the insurance coverage of previously uninsured adults. The objective of this project was to inform the design of more effective strategies to maintain or increase insurance coverage and to understand better the determinants of participation and crowd-out that can be useful when considering coverage expansions. The findings will also help to better predict the implications of reductions in coverage resulting from states' efforts to balance their budgets or in the economic context of a recession.  

Title: The Effect of Price on Health Plan Choices of Retirees  
Institution: University of California Irvine Graduate School of Management   
Principal Investigator: Thomas C. Buchmueller, Ph.D.  
Grant Duration: March 2002 - February 2003   

What is the price sensitivity and related health plan choices of Medicare-eligible retirees? Building on previous HCFO-funded research and analyzing data from a large western employer, the researcher analyzed the following: 1) What is the effect of out-of-pocket premiums on the health plan choices of Medicare-eligible retirees? 2) How price-sensitive are early retirees (under 65)? and 3) How responsive are retirees to financial incentives for declining coverage? The objective of this study was to educate decision makers who develop Medicare reforms by providing credible estimates of the price sensitivity of Medicare beneficiaries. In addition, the researcher sought to inform policymakers about how retirees respond to financial incentives and the impact this response might have on how insurance costs are allocated.  

Title: The Safety Net and Employer-Provided Health Insurance  
Institution: Northwestern University   
Principal Investigator: Anthony T. LoSasso, Ph.D.  
Grant Duration: October 2001 - March 2004 
  
How does the health care safety net affect the private insurance market?  The researchers examined how the structure and characteristics of the safety net (i.e., hospitals and federally qualified health centers [FQHCs]) affect employees' decisions to accept coverage for themselves and their dependents and employers' decisions to offer coverage.  The researchers posited that a stronger safety net may lead employees to accept jobs without health insurance or to refuse coverage if offered.  At the same time, they suggested that a stronger safety net may prompt employers not to offer coverage, especially for smaller employers with many low-wage, low-skill workers.  The researchers used Current Population Survey (CPS) data from 1988 to 1999 and Medical Expenditure Panel Survey (MEPS) data from 1996 to 1999. This study informs policymakers about the decision of employees to accept and employers to offer health insurance coverage and how the safety net influences those decisions. 

Title: Patterns of Individual Coverage  
Institution: University of Southern Maine, Muskie School of Public Service   
Principal Investigator: Andrew F. Coburn, Ph.D  
Grant Duration: October 2001 - June 2003   
 
How do the dynamics of the individual insurance market inform how long participants remain covered? What factors affect the length of participation and subsequent insurance status? Researchers at the University of Maine examined three specific questions: 1) Who uses the individual insurance market? 2) What role does individual insurance play in providing longer-term versus bridge coverage; and 3) What are the patterns of entry into and exit from the individual insurance market? The objective of the study was to better inform the policy debate, at both the federal and state levels, about the best options for sustaining affordable individual insurance coverage.  

1 "Employment Situation Summary," News Release, U.S. Bureau of Labor Statistics, November 7, 2008. Also see http://data.bls.gov/cgi-bin/print.pl/news.release/empsit.nr0.htm  
2 Lander, M. "A Towering Economic To-Do List for Obama," The New York Times, November 6, 2008. Also see www.nytimes.com/2008/11/06/business/06challenges.html?8br.  
3 DeNavas-Walt, C. et al. "Income, Poverty, and Health Insurance Coverage in the United States: 2007," Current Population Reports, U.S. Census Bureau, August 2008, p. 60-235. See also www.census.gov/prod/2008pubs/p60-235.pdf.
4 Ibid.
5 Ibid.
6 For more information on the reported decline in insurance coverage and its implications, please see the HCFO September Hot Topic "Insurance Coverage: Is a Reported Decline in the Number of Uninsured Good News?" at /publications/insurance-coverage-reported-decline-number-uninsured-good-news.
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8 Cunningham, P. and L. Felland. "Falling Behind: Americans' Access to Medical Care Deteriorates, 2003-2007," Tracking Report, Center for Studying Health System Change, No. 19, June 2008. See also www.hschange.com/CONTENT/993/993.pdf.
9 Cunningham, P. "Trade-Offs Getting Tougher: Problems Paying Medical Bills Increase for U.S. Families, 2003-2007," Tracking Report, Center for Studying Health System Change, No. 21, September 2008. See also www.hschange.com/CONTENT/1017/1017.pdf.
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11 Kirk, A. "The Individual Insurance Market: A Building Block for Health Care Reform ?" Report, AcademyHealth, May 2008. Also see http://www.hcfo.org/files/hcfo/synthesis0508_0.pdf; Rogal, D. "The Individual Insurance Market: A Building Block for Health Care Reform?" Policy Brief, AcademyHealth, May 2008. Also see http://www.hcfo.org/files/hcfo/HCFOpolicybrief0508.pdf.
12 Ibid.
13 Johnson, N. and A. Nicholas. "State Revenues Plummet: July-September Revenue Numbers are Worst in Years," Center on Budget and Policy Priorities." October 27, 2008. Also see www.cbpp.org/10-24-08sfp.htm.
14 Dorn, S. et al. "Medicaid, SCHIP and Economic Downturn: Policy Challenges and Policy Responses," Executive Summary, Kaiser Commission on Medicaid and the Uninsured, April 2008. Also see www.kff.org/medicaid/upload/7770.pdf ; K. Rueben, Urban Institute, February 2008. Unpublished estimates are based on data from the National Association of State Budget Officers.
15 Dorn, S. et al. "Medicaid, SCHIP and Economic Downturn: Policy Challenges and Policy Responses," Executive Summary, Kaiser Commission on Medicaid and the Uninsured, April 2008. Also see www.kff.org/medicaid/upload/7770.pdf.
16 Altman, D. "Perspectives on State Health Reform." Pulling it together., Kaiser Family Foundation. June 11, 2008. Also see www.kff.org/pullingittogether/061108_altman.cfm.
17 McNichol, E.C., and I.J. Lav. "State Budget Troubles Worsen," Center on Budget and Policy Priorities, November 11, 2008. Also see www.cbpp.org/9-8-08sfp.htm.
18 "Strategies to Help States Address Increased Expenditures during Economic Downturns," Medicaid, Government Accountability Office, October 2006.
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20 Campion, K. "Surviving the Perfect Storm: Impacts of Benefit Reductions and Increased Cost Sharing in a Medicaid Program," Findings Brief, AcademyHealth, Vol. XI, No. 4, July 2008. Also see http://www.hcfo.org/files/hcfo/HCFOfindings0708.pdf.
21 "The Budget and Economic Outlook: An Update," Congressional Budget Office, Pub. No. 3172, September 2008. Also see  www.cbo.gov/ftpdocs/97xx/doc9706/09-08-Update.pdf.
22 Ibid.
23 "Medicare Spending and Financing," Fact Sheet, The Henry J. Kaiser Family Foundation, September 2008. Also see  www.kff.org/medicare/7305.cfm.
24 Ibid.
25 "Medicare Now and in the Future," Health Care and the 2008 Elections, The Henry J. Kaiser Family Foundation, October 2008. Also see  www.kff.org/medicare/upload/7821.pdf. 
26 For more information on health care costs see March 2008 HCFO Hot Topic, "Health Care Costs-Challenges and Solutions." publications/health-care-costs-challenges-and-solutions
27 Helman, R. et al. "The 2008 Health Confidence Survey: Rising Costs Continue to Change the Way Americans Use the Health Care System," Notes, Employee Benefit Research Institute, Vol. 29 No. 10, October 2008. Also see  www.ebri.org/pdf/notespdf/EBRI_Notes_10-2008.pdf.