Healthcare Costs

The following (Healthcare Cost Increases) is taken from the longer Employ America piece. His portion touches upon healthcare costs and how those costs impact labor income and hiring. An Increase in healthcare and insurance costs is similar to a tax. As it increases, more money must be set aside having an impact on overall overhead. An employer can take different measure to account for it such as increase employee contributions, reduce parts of the plan, or maybe join a group of companies contracting healthcare as a group to achieve better pricing.

Part of a longer commentary which I may portray later.

“Post-ECI note: The Supply-side May Spoil Warsh’s (next FED Chief) Productivity Story,” Employ America

“Healthcare Cost Increases are Squeezing Paychecks and Budgets”

In our work on healthcare costs, we’ve emphasized the importance of healthcare to the labor market because of the prevalence of employer-sponsored insurance (ESI) as an employee benefit. Nearly 75% of workers aged 18 to 64 receive ESI from their employer, and another nearly 15% are covered as a dependent under someone else’s ESI policy. This results in an effective “head tax” on employment that depresses wages and employment.

Healthcare costs are increasing for a number of reasons. According to preliminary rate filings from insurers for small businesses, insurers cited higher prices for hospital and physician care, tariffs, and increased use of specialty drugs like GLP-1s. These increases lead directly into higher household insurance costs for businesses and households.

Health insurance benefits account for 7.1% of the total cost of compensation for civilian employees, but is now responsible for an outsized share of the growth in employee compensation costs. In yesterday’s Employment Cost Index report, wages and salaries increased by 0.7% from the previous quarter, but benefit costs increased by 1.3%. The cost of healthcare benefits, which are 5.7% from a year ago, have been growing at a clip not seen since the early 2000s. In surveys conducted late last year, businesses projected that healthcare costs in 2026 would increase by 6.5% to 7.6%, a faster increase than in 2025.

The result is that employee compensation costs are growing quickly, but not in a way that redounds to labor income. The rapidly Increasing costs for ESI plans are likely to dampen labor income. In the New York Fed’s most recent Regional Business Survey, businesses cited double-digit percentage increases in the cost of health insurance over the past year, a faster increase than that of any other production input.

The New York Fed’s survey suggests that the rapid increase in health benefit costs is squeezing wage growth. “Many” firms reported reducing wage increases and reported that wage increases would have been 0.9 percentage points higher if health costs had remained constant from last year. Still others reported passing on costs to workers by increasing employee contributions. In both cases, the income available to employees to spend on other consumption goods and services is squeezed by the increase in healthcare costs.

For individual market enrollees, the picture is even worse. Premiums for benchmark silver plans increased by 21.7% in 2026, even before changes to enhanced premium tax credits. While the premium increases for these individuals doesn’t affect their wages, it still results in a stark decrease in the leftover income they’ll have to put towards consumption elsewhere.

Post-ECI note: The Supply-side May Spoil Warsh’s Productivity Story,