Economic Consequences of Illness in the Workplace

  • Paul E. Greenberg, Stan N. Finkelstein and Ernst R. Berndt
  • July 15, 1995

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.