Will health care reform cause lower wages?

A new study by Steven Nyce and Syl Schieber looks at the effects on wages of expanding health insurance coverage. Their results are devastating.

Dr. Schieber is a pension/benefits expert with Watson Wyatt. He is Chairman of the Social Security Advisory Board and he served on the Clinton Administration’s Social Security Advisory Council of 1994-96.

Here are Nyce & Schieber (emphasis in the original):

Measured by hourly pay growth or increases in earnings, workers across much of the earnings spectrum are not faring as well this decade as they did in the last. On the other hand, when benefits are factored in, most workers appear to have done as well or better over this decade as they did in the last, and those at the bottom or middle of the earnings distribution have done as well as many at the top. The rapid run-up of both health and retirement costs has caused the slowdown in wage growth we have seen this decade. Health care reform that does not control costs – and that in fact could exacerbate them – presents risks that have yet to be widely discussed. Specifically, if reform accelerates health benefit cost inflation, the associated cost increases might eat up most – if not all – of workers’ wage increases over the next few years and possibly for decades to come.

Let’s look at some of their numbers. For comparison, over the period 2000-2007 health benefit costs grew at the rate of growth of compensation + 3.2 percentage points per year.

Nyce/Schieber provide eight scenarios. I will use these four:

  • Baseline – Assume that health cost growth is cut in half from its recent trends, at compensation + 1.5% per year.
  • Scenario 1 – expanded coverage & cost growth slows: Health insurance reform provides universal coverage through a mandate. Health cost growth is the same as in the baseline scenario, equal to compensation growth + 1.5% per year.
  • Scenario 2 – expanded coverage & no change in cost growth: Health insurance reform provides universal coverage through a mandate. Health cost growth is at the historic (2000-2007) rate of compensation growth + 3.2% per year.
  • Scenario 3 – expanded coverage accelerates cost growth: Health insurance reform provides universal coverage through a mandate. Expanded coverage increases demand for health care, increasing health cost growth to be compensation growth + 6% per year.

I have picked four representative numbers for each scenario from the tables in the Nyce-Schieber paper. In each case I use the numbers for the period 2007-2030 for:

  • All workers
  • A worker in the 3rd income decile (Imagine a worker who has income lower than 75% of the American workforce.)
  • A median income worker (I interpolated between the Nyce-Schieber 5th and 6th decile numbers.)
  • A worker in the 8th income decile (imagine a worker who has income greater than 75% of the American workforce.)

Let’s look at the average annual wage increases for each of these workers in each of these scenarios.

All workers

3rd decile

Median worker

8th decile

Baseline

+1.02%

+0.96%

+0.96%

+1.00%

Scenario 1

+0.91%

+0.63%

+0.87%

+0.96%

Scenario 2

+0.59%

-0.02%

+0.42%

+0.66%

Scenario 3

-0.69%

-2.84%

-1.32%

-0.57%

Let’s put this into sentence form:

  • If health care reform finances universal coverage primarily through a mandate to buy health insurance, and if health cost growth continues as it has in recent years, a median worker’s real wage growth rate would be more than cut in half.
  • If health care reform instead accelerates health cost growth because expanded insurance coverage means more health services are consumed, that same median worker would see his real wages shrink.
  • For lower-wage workers the picture is worse. If health care reform finances universal coverage primarily through a mandate to buy health insurance, and if health cost growth continues as it has in recent years, a worker in the 3rd income decile would see no real wage growth.
  • And if health care reform instead accelerates health cost growth because expanded insurance coverage means more health services are consumed, that same low-wage worker would see his real wages shrink dramatically.

Is Scenario 3 realistic? Would expanded health insurance coverage “add fuel to the fire” and cause health cost growth to increase? Here are Nyce & Schieber:

Health care reform is likely to impose new inflationary pressures as broader coverage increases the demand for health services.

When the Medicare program was started during the 1960s, real wages grew at a compound annual rate of 2.8 percent, while employer-sponsored health benefits costs grew by 8.9 percent per year, after adjusting for inflation. During the 1970s, when demand for services under Medicare intensified, real wages grew by 0.8 percent per year, while employers’ health benefit costs grew by 8.1 percent per year, after adjusting for inflation. Given that the legislation now being proposed to expand health insurance coverage includes no particularly effective mechanisms for controlling the pressures of new demand for health goods and services, it seems prudent to at least consider a scenario where expanded coverage accelerates health inflation. In alternative scenario 3, our high-cost scenario, employers’ health costs increase by 6 percentage points per year more than compensation.

Here are some key conclusions from Nyce & Schieber:

In projection scenarios that involve both expanded health insurance coverage and continuing high health inflation rates, the outcomes are dire, including falling wages at the bottom of the earnings spectrum and very slow wage growth on up the earnings distribution. These outcomes are projected to persist over at least the next couple of decades, and there are no indications they would improve thereafter.

Expanded health care coverage coupled with accelerated health inflation rates produce even worse results. The resulting rapid escalation in health benefit costs would drive disposable wages downward across most of the earnings spectrum, although lower-earning workers would be the hardest hit. These poor outcomes would persist over the entire projection period.

The risks of continued health cost inflation are too high to ignore. If we do not throttle back the system, many workers will have to live with much lower compensation rewards in coming years. The likelihood that entitlement reform will follow on the heels of health reform makes controlling health costs even more urgent. If final health reform expands employment-based coverage but fails to slow health cost inflation, the discontent with wage growth so far will seem negligible compared with reactions to falling wages on the horizon.

At this juncture, we have a choice: We can either change the incentives in our health care payment systems to slow the growth of health costs and encourage the delivery of quality services, or we can concede that standards of living – which have risen fairly consistently since World War II – have reached a pinnacle and are headed for decline.

In July the health care reform debate looked at the effects of proposed legislation on the federal budget. Congress needs to focus on the effects of their proposed policies on workers’ future wages.

(photo credit: zero by jima)

By | 2017-05-23T19:06:38+00:00 Friday, 7 August 2009|