A Hidden Cause of Layoffs: Rising Health Care Costs

Layoffs happen for many reasons, but a new study identifies a cause that’s often overlooked. Price hikes for health care generated by hospital mergers often lead to job cuts by employers who can no longer afford to contribute to worker insurance plans. 

The correlation between increases in healthcare costs and subsequent elimination of jobs was established by a National Bureau of Economic Research working paper released Monday. After analyzing mergers that occurred between 2000 and 2020 in various regional markets, researchers found when “health care prices increased, non-health care employers responded by reducing their payroll and cutting the jobs of middle-class workers.” 

The mechanics of that are simple, logical, and unfortunate. Jolts to hospitals charges for care then drive up what companies pay for employee health coverage, which quickly becomes very expensive, and make the same workers vulnerable.

“It’s broadly understood that employer-sponsored health insurance creates a link between health care markets and labor markets,” said study co-author Zack Cooper, an associate professor at the Yale School of Public Health. “Our research shows that middle- and lower-income workers are shouldering rising health care prices, and in many cases, it’s costing them their jobs.”

Why does this affect lower wage workers in particular–including many who rarely, if ever, need of hospital attention? 

Because—unlike salaries that tend to get larger with an employee’s skills and experience—companies typically pay the same, per-person contribution for medical coverage for all their employees. That cost rose to an average $12,000 per year in 2019, the researchers said–an amount representing a far higher percentage of labor-linked expenses for lower-paid workers than those earning more. The upshot, the study found, was companies understood they eliminated a larger per-worker portion of rising healthcare costs by focusing layoffs on people making between $20,000 and $100,000 annually than shedding higher earners.

That dynamic has other unhappy effects. After crunching various federal data, researchers determined a 1 percent rise in healthcare costs following mergers generated a 0.4 percent drop of employment among companies near hospitals involved. That led to a 0.27 percent slide in the area’s per capita income, lower government tax receipts, and–with more people filing for unemployment–higher federal assistance outflows. 

That dynamic became more evident over the past two decades, following over 1,000 mergers affecting local and regional hospital markets–20 percent of which drew the scrutiny of antitrust regulators. While the study did not find that all consolidations within the nation’s roughly 5,000 hospitals resulted in higher user costs, those that did routinely provoked surrounding job losses–more than 550 in some cases.

“Our results show that a hospital merger that raised prices by 5 (percent) would result in $32 million in lost wages, 203 lost jobs, a $6.8 million reduction in federal tax revenue, and a death from suicide or overdose of a worker outside the health sector,” noted Stuart Craig, an assistant professor at the University of Wisconsin-Madison Business School and study participant.

While the findings were presented in an unflattering manner for health care sector companies driving the wave of mergers, they didn’t blame the response of employers moving to offset the rising costs that resulted. Indeed, unless a tax-based rather than private health insurance system is adopted by the U.S., the authors seem to assume more modestly paid employees will continue bearing the brunt of future hospital M&E activity, because that’s where the most expenses lie for companies financing coverage.

 “Bottom line: Rising health care costs are increasing economic inequality,” said Cooper.