Accounting for the Slowdown in Employer Health Care Costs

The most widely used measure of employer health care costs, the health insurance component of the Employment Cost Index, indicates that cost growth has been decelerating since 1989. In recent years the level of health care costs has even declined in nominal dollars. This paper analyzes the components of changes in employers' health care expenditures over the 1992-94 and 1987-93 periods. We find that employer costs have decreased primarily as a result of a decline in the fraction of workers with coverage and a large decrease in the rate of growth of insurance premiums. We conclude that the shift to managed care does not appear to be directly responsible for significant cost savings because managed care premiums are almost as high as those for fee- for-service plans, on average. Finally, we note that there is a significant need for improved data collection in this area.