Rising Healthcare Costs: The Hidden Reason Behind Layoffs

Have you ever imagined rising healthcare costs as a reason for layoffs? It has been an understated cause of layoffs for decades, until a recent National Bureau of Economic Research study demonstrated the correlation between increases in healthcare costs and job termination.

Wonder what the logic behind this market interaction is? This Pacific Prime article aims to shed light on this matter, delve deep into hospital mergers and companies’ retaliation to these market behaviors, and empower you with knowledge of the recent talent attraction and retention trends.

Rising Healthcare Costs and Layoffs: The Logic Behind

The logic is straightforward– healthcare costs increased, there was more financial pressure to keep employees, and non-healthcare employers responded by reducing their payroll through rounds of layoffs. Among all classes of workers, middle-class workers are those affected the most.

It is widely believed that employer-sponsored health insurance connects healthcare and labor markets. Companies have to pay for employee health coverage as part of their employee benefits package, most commonly health insurance, social security, pensions, and paid medical leaves.

Wonder why the lower to middle-class workers are the major victims of layoffs amidst rising healthcare costs? The reason is that they are considered to have less contribution due to the nature of their position being execution-focused rather than strategy-oriented, but the labor costs remain the same.

Salaries increase with an employee’s skills and experience, while medical coverage is relatively stable and even across hierarchies. There is a higher percentage of labor-linked expenses for these workers when compared to high-skill C or M-level workers.

The Understated Cause of Rising Healthcare Costs

An understated cause of rising healthcare costs is hospital mergers. There have been a lot of mergers between hospitals and cross-regional health systems (cross-market mergers) over the past two decades, resulting in hospitals raising their prices, and directly increasing employers’ medical expenses.

Cross-Market Mergers

As more health systems face an uncertain future, they are more likely to look for partners to keep their doors open. A cross-market merger refers to the merger between two healthcare providers that operate in different geographic markets. There are usually two scenarios:

• Merger of two health systems that operate in different geographic markets
• A health system acquires an independent hospital in a geographic market where it does not operate

For instance, a larger hospital may be able to expand its operations geographically, while a smaller hospital that is struggling to stay open owing to limited resources, may look to merge with larger hospitals in order to enhance their financial situation, services, and management strategy.

Over the past two decades, it is estimated that over 1,500 mergers have taken place and influenced the market. Not all mergers resulted in higher medical costs, but those that did triggered consequent company layoffs and job losses.

These mergers could lead to healthcare price increases, with the increment estimated to range around 6 to 17 percent. The key reasons are:

• The combined health systems can use its dominant position in the market to set higher prices
• The combined health systems are hesitant to lower prices in one market to avoid being outcompeted by competitors that also operate across the same markets
• The combined systems will have a higher bargaining power with insurance providers for higher prices

Non-Cost-Related Implications

The most direct, non-cost-related impact of hospital mergers is reduced access to care. A large hospital that acquires a smaller rural hospital may have the urge to eliminate less profitable service lines and may be less responsive to community needs.

Insurance-wise, the insured will have less freedom to access healthcare services wherever they want. Due to the higher bargaining power of the combined systems for higher prices, it propels insurers to differentiate between these “high-cost” and “low-cost” providers.

Unless the insured are willing to pay extra premiums to access “high-cost” providers, they will have limited options when more and more hospitals merge. That said, the healthcare provider network ultimately depends on the cost-containment strategy that the insurance provider takes.

Nonetheless, policyholders will have less health insurance coverage for the same premium, so it would be necessary for them to budget wisely and be selective about whether they need public or private healthcare services for ailments and injuries of various degrees.

Seek For Employee Benefits Advice Amidst Rising Healthcare Costs

Although employers are not to blame for layoffs to offset rising healthcare costs, it might not be the only solution.

Due to the fact that most benefits are not fully utilized and left wasted owing to a lack of communication and knowledge about benefit selection, most are not aware of the availability of benefits, causing a mismatch in expectations between employees and employers.

Consider re-evaluating your employee benefits package with Pacific Prime! It does not have to be expensive to implement flexible benefits, and it allows your employees to select benefits that suit their needs and lifestyles without limitations.

By doing so, you might even realize you are providing personalized benefits to your employees at an even lower cost than what you are currently offering.

Reach out to one of our expert advisors today for impartial advice and keep your talents with you!

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Eric Chung

Content Creator at Pacific Prime

Eric is an experienced content writer specializing in writing creative copies of marketing materials including social media posts, advertisements, landing pages, and video scripts.

Since joining Pacific Prime, Eric was exposed to a new world of insurance. Having learned about insurance products extensively, he has taken joy and satisfaction in helping individuals and businesses manage risks and protect themselves against financial loss through the power of words.

Although born and raised in Hong Kong, he spent a quarter of his life living and studying in the UK. He believes his multicultural experience is a great asset in understanding the needs and wants of expats and globe-trotters.

Eric’s strengths lie in his strong research, analytical, and communication skills, obtained through his BA in Linguistics from the University of York and MSc in Teaching English to Speakers of Other Languages (TESOL) from the University of Bristol.

Outside of work, he enjoys some me-time gaming and reading on his own, occasionally going absolutely mental on a night out with friends.

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