MIT Sloan Management Review

Financial Management, Human Resource Management and Industrial Relations

Economic Consequences of Illness in the Workplace

By Paul E. Greenberg, Stan N. Finkelstein and Ernst R. Berndt

July 15, 1995

WHEN EMPLOYERS FOCUS ONLY ON THE DIRECT, OUT-OF-POCKET COSTS OF HEALTH CARE, THEY FAIL TO CONSIDER THE INDIRECT costs of illness in the workplace from workers’ impaired functioning on the job and absenteeism. The authors present a case study of the effects of clinical depression on direct and indirect health-related costs and provide a model that employers can apply to a wide range of illnesses to analyze their investments in health care. The authors apply the framework to several workplace situations — employees’ depression, cigarette smoking breaks, and arthritis — to estimate the costs of lost productivity. They also show how to do a break-even analysis to determine when employers’ investments in health interventions are likely justified.

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In 1994, U.S. health care expenditures approached $1 trillion, of which private businesses paid a substantial portion. While the debates on regulatory measures to contain these costs have not been resolved, the market has responded decisively to pressures from increased health care spending, evidenced by the broad shift to managed care. This trend has moved decision-making authority from providers and recipients of health care goods and services. Increasingly, those who pay for health care, including insurers, managed care organizations, and employers, are asserting their influence over the way treatment decisions are ultimately made.1

If more effective management can curtail cost escalation in health care, an employer can channel some resources otherwise allocated to health care for other uses. To capitalize on this opportunity, some employers have attempted to intervene directly in the workplace to address health care issues, which requires a clear understanding of the costs they currently bear. Whereas employers routinely calculate and report out-of-pocket health care costs, they generally do not understand the opportunity costs associated with health care decisions. Our purpose is to illustrate the importance of the “indirect” costs of illness in the workplace, especially the effects of impaired functioning on the job as well as absenteeism. Without paying proper attention to these additional costs, employers are unlikely to make the best health care expenditure decisions, from a... To read the complete article, login or sign-up using the form below.

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