Health care costs hinder economy

By Tom Abate
San Francisco Chronicle

Economists have warned for months that rising energy prices could be dragging down the economy.

Now there are signs that steeply rising health care costs could be an even bigger factor than gasoline in slowing the American consumer spending machine. As employers have tried to lighten their own health care loads by asking workers to pay more in premiums and co-payments, Labor Department data show that health care costs are taking a bigger slice of household budgets.

“It is like a tax,” said Wells Fargo economist Sung Won Sohn. “You have less discretionary income to spend on other things, whether it is bicycles or shoes or a vacation.”

Several economic indicators have shown that consumer spending has cooled recently. Sales volume at chain stores, a widely watched measure, has been increasing recently at an annual pace slighty more than 2 percent, significantly below the rate of more than 3 percent posted the past few years. Rising health costs could be an important factor, some experts are beginning to conclude.

“Consumers are now spending more on health care than ever before,” said Rakesh Shankar, health care specialist with the Pennsylvania consultancy firm Economy.com.

“It’s difficult to isolate the impact of health care costs, but what’s unmistakable is that it’s taking away from (discretionary) spending,” Shankar said. “The only question is how much.”

Every year, the Labor Department analyzes how consumers spend their money, a study called the consumer expenditures survey. It showed that in 2002, the most recent year for which data are available, the average household spent $2,350 a year, or 4.8 percent of its income, on health care. In 1999, the average household health expenditure was $1,959, or 4.5 percent of income.

The Labor data show that in 2002, the average household spent nearly twice as much for health care as it did for gas. Health care spending has risen so rapidly that it passed federal taxes as a percentage of average household income in 2002.

Data for 2003, which will be released in November, are expected to show health costs continuing to rise.

When Sohn analyzed how out-of-pocket health care costs were affecting people with different incomes and educations, he found that it placed the greatest burden on those least able to pay.

“This health tax falls most heavily on those at the bottom of the income spectrum because they have to spend a higher portion of their income to cover these costs,” Sohn said.

Labor Department data show households where wage-earners had advanced degrees spent 3.8 percent of their after-tax income on health care. In households where workers didn’t complete high school, the comparable figure was 7.2 percent.