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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 systemwide perspective.2
Costs of Illness in the Workplace
Cost-of-illness analysis requires a specific vantage point. For example, we can examine the costs of a particular illness — direct and indirect — with respect to an individual sufferer. Alternatively, we can explore society’s stake in the illness using a slight variant of the same methodology. While direct costs include all the out-of-pocket expenditures incurred for treatment, indirect costs include the lost output that results from illness. This latter category includes, but may not be limited to, lost resources due to premature death.
Although this type of analysis usually takes the perspective of the individual or of society, we can focus on the vantage point of other agents or groups of interested parties as well. Our discussion takes the perspective of employers who want to ascertain the cumulative resource depletion from illness in the workplace. A specific firm can easily develop a simple extension of the same analysis, based on that company’s unique features and the demographics of its workforce.
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1. P. Danzon, L. Boothman, and P. Greenberg, “Consolidation and Restructuring in the Health Care Sector: A Precursor to Health Care Reform” (Cambridge, Massachusetts: Analysis Group, Inc., Discussion Paper 94–5, October 1994).
2. A straightforward analogy can be made between the effects of employee health status on accidents in the workplace, including attention to out-of-pocket costs as well as forgone output.
3. More recent surveys have estimated health expenditures per employee in the range of $3,500 to $4,000. Those results can be reconciled with the data presented in Figure 1, part C with attention to the fact that the data in the figure are based on all employees in the labor force. In contrast, the more recent surveys are usually based on the total number of employees covered by employer-sponsored health plans, which is a lower number.
4. S.F. Lansburg, The Armchair Economist: Economics & Everyday Life (New York: Free Press, 1993).
5. T.M. Gill et al., “A Critical Appraisal of the Quality-of-Life Measurements,” Journal of the American Medical Association, 24/31 August 1994, pp. 619–626.
6. See P.E. Greenberg, L.E. Stiglin, S.N. Finkelstein, and E.R. Berndt, “The Economic Burden of Depression in 1990,” Journal of Clinical Psychiatry 54 (1993): 405–418; and
P.E. Greenberg, L.E. Stiglin, S.N. Finkelstein, and E.R. Berndt, “Depression: A Neglected Major Illness,” Journal of Clinical Psychiatry 54 (1993): 419–426.
7. L. Eisenberg, “Treating Depression and Anxiety in Primary Care: Closing the Gap between Knowledge and Practice,” New England Journal of Medicine 326 (1992): 1080–1084.
8. Not all of these direct costs are necessarily paid by employers, however. As we described earlier, private business paid less than 30 percent of all health care expenditures. Households paid approximately 35 percent in private insurance and out-of-pocket expenditures, while federal, state, and local governments paid an additional 35 percent.
9. Some employers might at times pursue other strategies, including ones that may be unlawful. An employer could subtly attempt to minimize the extent of the problem at the most senior levels of the firm by changing its hiring and promotion practices to inhibit such “high risk” individuals. Alternatively, it may attempt to pay a depressed employee less than an asymptomatic counterpart.
10. D.A. Regier et al., “The NIMH Depression Awareness, Recognition, and Treatment Program: Structure, Aims, and Scientific Basis,” American Journal of Psychiatry 145 (1988): 1351–1357.
11. Recent research at the First National Bank of Chicago illustrates the substantial impact of depressive disorders on absenteeism in a corporate setting. It was found that depression resulted in longer disability periods and more frequent disability recurrences than a number of physical disorders with much greater visibility. See:
D.J. Conti and W.N. Burton, “The Economic Impact of Depression in a Workplace,” Journal of Occupational Medicine 36 (1994): 983–988.
12. In recent years, the focus has shifted from attention on cost considerations to greater concern with value for dollars spent. Employer B would shift this focus even further with explicit attention to employee health as opposed to employee health care.
13. From a workplace perspective, the implications of depression-related suicide can be expressed in terms of turnover costs. For example, suppose it generally requires an investment of one year’s salary to search for, identify, and fully train a new employee. The cost associated with a fatality in the workplace due to a specific illness would then be the number of employee deaths per year multiplied by the average annual salary of those who had died. In the case of depression, it is commonly estimated that 60 percent of all suicides are directly attributable to depressive symptoms. If we assume that half these individuals were in the labor force prior to their premature deaths, this implies that in 1990, approximately 7,200 working men and 1,600 working women committed suicide as a result of depression. This results in added turnover costs totaling approximately $200 million per year, or less than one percent of all the workplace costs associated with depression.
14. Depending on the nature of the disability plan, however, a portion of the absenteeism costs may not be borne by the employer. For example, if the direct costs of illness in the workplace already include disability insurance premiums that cover all short-term and long-term disability days for mental illness, this additional cost component should not be added to the costs of illness from an employer’s perspective. It is important to recognize, however, that extended absenteeism from work due to a mental health disorder may fall outside the scope of many disability plans.
15. For a chronic illness, the amount of work time missed can be subtracted from an entire work year to estimate the amount of time that employees perform at diminished productivity. In contrast, in the case of an acute or episodic illness, only a portion of the entire work year likely would be characterized by impaired work performance.
16. This approach is conservative in the sense that the costs of employing a particular worker typically exceed that employee’s salary (i.e., with attention to supplementary benefits).
17. Based on the annual prevalence of depression in the workplace, as well as the average length of time of impaired performance at work due to the disorder.
18. Based on the annual prevalence of depression in the workplace, as well as the average duration of absenteeism from work as a result of the illness.
19. Alternatively, if smokers uniformly extend their workdays to offset the time spent on smoking breaks, the workplace costs associated with this nonproductive activity at work could be zero. These estimates can be obtained by interpolating the data in Table 1.
20. In a specific employer context, this assumption can be replaced with actual salaries in the particular workforce.
21. R.W. Fogel, “Economic Growth, Population Theory, and Physiology: The Bearing of Long-Term Processes on the Making of Economic Policy,” The American Economic Review 84 (1994): 369–389.