Public subsidies of low-wage employment: the case of uncompensated health care.

Author:Waddoups, C. Jeffrey
Position:Notes and Communications

As real wages have fallen or stagnated for workers at the lower end of the skill distribution and compensation packages have become less likely to contain employment-based health insurance (EBHI), many workers and their families are becoming less able to sustain themselves economically with income from work. (1) Increasingly, working families have begun to rely on publicly funded assistance programs on an ongoing basis to meet their basic subsistence needs (Zabin, Dube, and Jacobs 2004). (2) Because working families comprise a significant portion of recipients, such programs can be usefully thought of as providing permanent wage subsidies rather than temporary assistance for households experiencing transitory economic hardships. The present study focuses on uncompensated health care provided by public hospitals and clinics as another form of ongoing wage subsidy.

A particularly vexing problem associated with publicly provided assistance programs are the perverse incentives that they provide to employers whose workers rely on such programs to subsidize wages. It is reasonable to expect that if some firms are able to reduce labor costs by relying on public assistance programs to subsidize wages, then their competitors, rather than impose relatively higher labor costs on themselves, will have an incentive to do likewise. As firms compete by externalizing labor costs in this manner, a vicious circle of low wages and expanded dependence on publicly provided goods and services may be established. Increased dependence on public assistance associated with below-subsistence wages has the potential to overwhelm the programs that were meant to provide short-term assistance during times of temporary economic hardship. (3) Indeed, the expanding "living wage" movement is, in part, a manifestation of increasing reluctance among taxpayers to subsidize employers that pay below-subsistence wages and do not offer affordable EBHI (Fairris and Reich 2005).

Consumption of uncompensated medical care by the employed suggests that wages and other compensation (e.g., EBHI) are not sufficient to meet basic health care needs. Moreover, to the extent that uncompensated health care is subsidized by the public and consumed by wage earners or their dependents, it Can, arguably, be thought of as a wage supplement funded by taxpayers. Using a unique data set from a public hospital and its affiliated clinics, which contains information on uncompensated care, employment status, and industry of employment, I address the relationship between employment and the consumption of uncompensated health care. I also examine the extent to which industries are under- or over-represented among uncompensated care recipients.

The study makes two contributions to the literature. First, it adds to the discussion of how publicly subsidized goods and services have the potential to become sources of on-going wage subsidies. Second, it provides a more detailed analysis of employment characteristics of uncompensated care recipients, which has been largely neglected because of the lack of data. (4)

Background: Uncompensated Care and the Lack of Health Insurance

Households in the United States generally finance their medical care using health insurance. Thus it is the lack of health insurance coverage that underlies consumption of uncompensated care. Although a majority of Americans still obtain their health insurance through employment, evidence suggests that the institution is in decline. During 2000, 67.8 percent of the non-elderly was covered by EBHI, and 16.1 percent--amounting to 39.5 million people--had no health insurance coverage, according to data obtained from the Current Population Survey (CPS). By 2003 only 63.9 percent of the population had EBHI, which left 17.7 percent uninsured (Holahan and Ghosh 2004). Another study based on data from the National Survey of American Families also found that the rate of EBHI had declined. During the period between 1999 and 2002 the rate of coverage fell from 69.2 percent to 66.9 percent (Blumberg and Holahan 2004). Research focusing on rates of uninsurance by state found that between 1992 and 2001 the rate had increased in thirty-three states among people employed for wages. No states were found to have a decline in the uninsurance rate among the employed (Nelson et al. 2004)

Linda Blumberg and John Holahan (2004) broke down the source of declining EBHI during the 1999-2002 period into four categories: (1) a change in the probability of work, (2) a change in the probability of receiving an offer of insurance for those who do work-also known as the "take-up rate," (3) a change in the probability of accepting an offer for those who receive one, and (4) a change in the probability of receiving EBHI from another source. Nearly two-thirds (64.4 percent) of the decline was attributable to a fall in the take-up rate. Increased prices, higher co-payments and deductibles, or strict eligibility requirements, for example, could be causes for a reduction in take-up rates. Most of the remaining decline (27.8 percent) was the result of a lower probability of work over the period because of recession.

Privately purchased individual health insurance policies are not a feasible option to fill the gap left by the declining incidence of EBHI. One problem with individual policies is that they are often not available for those with pre-existing conditions such as HIV and diabetes (Geyman 2005). Furthermore, individuals that weigh more than 10 percent above medically established norms are often denied individual insurance policies. (5) Such practices have the potential to exclude large portions of the uninsured population. For example, consider recent research on the prevalence of being overweight or obese in the United States that found 70 percent of men between the ages of 40 and 59 and 74.1 percent of men over the age of 60 were either overweight or obese. (6) The figures for females were 66.1 and 68.1 percent. The same research indicated that 28.8 percent and 31.1 percent of men in the two age categories were obese. The corresponding figures for females were 37.8 and 35.0 percent (Flegal et al. 2002). If insurance companies are reluctant to underwrite private insurance policies for those who are overweight or obese, then clearly a large proportion of such individuals are uninsurable in the private market. For those who are insurable, the prices of private policies are prohibitively high, and if some adverse health event occurs, the process of re.underwriting substantially raises premiums, often to a level that becomes unaffordable (Geyman 2005).

Government-sponsored health insurance programs as they are currently constituted are also not a solution to the lack of EBHI because of their exclusionary eligibility criteria. Consider Medicaid, the government-sponsored health insurance program for low-income mothers and children. Eligibility requirements for Medicaid vary significantly by state, making it problematic to generalize about access to the program; however, the median threshold of household income for eligibility by state was a modest $10,000 in 2001, or 69 percent of the federal poverty line for a family of three (Geyman 2005, 69). Thus many low-income families have incomes above the eligibility cut-off.

Also reducing Medicaid's ability to fill in the insurance gap is...

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