Medical Care Spending and Labor Market Outcomes: Evidence from Workers' Compensation Reforms

There is considerable controversy over whether much of the spending on health care in the United States delivers enough value to justify the cost. We contribute to this literature by studying the causal relationship between medical care spending and labor outcomes, exploiting a policy which directly impacted medical spending for reasons unrelated to health and using a unique data set which includes medical spending and labor earnings. Our focus on labor outcomes is motivated by its potential usefulness as a measure of health, the importance of understanding the relationship between health and labor productivity, and the policy interest in improving labor outcomes for the population that we study injured workers. We exploit the 2003-2004 California workers’ compensation reforms which reduced medical care spending for injured workers with a disproportionate effect on workers suffering lower back injuries. We link administrative data on workers’ compensation claims to earnings and test the effect of the reforms on labor force outcomes for workers who experienced the biggest drop in medical care costs. Adjusting for the severity of injury and selection into workers’ compensation, we find that workers with low back injuries experienced a 7.3% greater decline in medical care after the reforms, and that this led to an 8.3% drop in post-injury earnings relative to other injured workers. These results suggest jointly that medical care spending can impact health and that health affects labor outcomes.