The Economic Consequences of Rising Healthcare Costs

Abstract

The incessant rise in healthcare costs has been the centerpiece of policy and political debates. This is unsurprising given that the total healthcare spending in the U.S. accounts for 18-20% of GDP. However, the negative consequences of this economic rise are not fully understood. My thesis investigates the impact of rising healthcare costs on households, firms and the broader economy. The first chapter focuses on the impact of increasing hospital prices on the financial health of households and how it influences their credit decisions. In the second chapter, joint work with Cyrus Aghamolla and Richard Thakor, we investigate the effect of increased healthcare costs on firms and how they spill over to the local economy. The title of the first chapter is “Are hospital bills hazardous to your financial health?”. In this chapter, I study the effect of hospital prices on the financial health of individuals. I use detailed healthcare microdata and state hospital cost reports obtained via a series of Freedom of Information Act (FOIA) requests to construct a novel zip-level measure of prices that hospitals charge for their services. Using insurer medical loss ratio as an instrument, the findings reveal a causal link between higher hospital prices and adverse financial outcomes, including a rise in personal bankruptcy filings and reduced demand for home mortgages. I provide evidence that financial institutions are less inclined to approve mortgage applications due to elevated debt-to-income ratios resulting from escalating hospital prices. Additionally, I show an increase in credit card debt and increased use of home equity line of credit. Furthermore, I provide evidence that such price increases disproportionately impact areas with individuals particularly exposed to healthcare prices, such as areas with a higher percentage of uninsured individuals, lower Medicare/Medicaid enrollment and areas with a higher population concentration of people of color. However, the presence of home equity appears to mitigate some of these effects, as areas that experienced plausibly exogenous increases in house prices are less impacted by increases in hospital prices. The results are robust to alternative specifications and using an alternative instrument exploiting changes in prices induced by hospital competition in a geographic area. The title of the second chapter, joint work with Cyrus Aghamolla and Richard Thakor, is “When Private Equity Comes to Town: The Local Economic Consequences of Rising Healthcare Costs”. In this chapter, we examine the effect of increased healthcare costs on local economic conditions. We use private equity (PE) buyouts of U.S. hospital systems as a shock to the healthcare costs faced by firms in affected areas. Our primary identification strategy consists of the PE acquisition of a large-scale hospital chain, with hospitals dispersed across various communities in the U.S. We supplement this strategy with broader evidence including all PE buyouts of hospitals over a longer sample period. We provide evidence that PE buyouts of hospital systems result in higher healthcare insurance premiums paid by firms, and such rises in premiums lead to higher business bankruptcies, an increase in business loan volume, slower employment and establishment growth, and reduced innovative output. The results are stronger for areas with firms that are plausibly more exposed to the effects of PE hospital buyouts, such as areas where the PE-acquired hospitals have a greater market share and areas with a greater degree of labor intensity. We additionally provide evidence that increases in healthcare costs result in firms being more vulnerable to the financial crisis, suggesting that the negative economic consequences of rising healthcare costs are due to weakened firm balance sheets which cause firms to be more susceptible to negative economic shocks.