Will health care reform cause lower wages?
7 August
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.
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@Jim Pier –
Because a free market in health care is a fantasy. At the very minimum, law states that no one can be denied emergency care on the basis of ability to pay, which means that unless the hospital can squeeze money out of the uninsured, the cost gets dumped on them, and by greater extension the rest of us. If you want to change that, feel free to say so, but don’t be surprised if your view isn’t too popular – “let ‘em die in the streets” tends to garner little support.
That only works if we are wiling, as a society, to absorb the full consequences of that process. We’re not – as I mentioned, we mandate a degree of emergency care, and the fact that there has been kinds of various health assistance going back decades (well before Medicare and Medicaid) suggests that we aren’t willing to simply let individuals suffer and die due to the lack of money to pay for the necessary health treatment (in theory, at least).
That doesn’t apply in other areas. Few people care, for example, if someone can’t buy a car and is forced to take a bus.
You could make this argument about anything involving a middle-payer, including banks, other forms of insurance, etc. You could say, for example, that bank loans and assistance encourages people to spend more on housing, since otherwise they’d have to save up money.
As for health insurance, keep in mind that bargaining power makes a big difference. There’s a reason why large groups of buyers (the health plans of large companies, etc) have the ability to negotiate lower individual rates on insurance than individuals.
Obama’s bill, as written, requires that medical schools increase their intake of disadvantaged minority groups, and many people are predicting that under socialized medicine, our best and brightest won’t go into medicine, and that doctors and nurses will be imported to keep the system functioning, as is the case in Britain and Canada. Do you think that you will be able to insist on doctors who speak English as their native language? No, you will have to take the doctor assigned to your case. My husband was in the military back in the 80s. Lots of doctors from India with incomprehensible accents, and there is no way to avoid them.
Obama’s bill, as written, does not require people to prove US citizenship before they get treated. Great Britain has a horrible problem with Africans with HIV flying into London and then requiring $250,000 worth of treatment over the years that it takes to deny their asylum case and send them home. If Obamacare passes, everybody in the world with a birth defect, or cancer or kidney disease, etc., will spend their last nickel on a flight to the US, and cab fare to the nearest hospital. It makes no sense to offer free medical care until the borders are controlled, and immigration is limited to people who speak English on arrival, and who have a reasonable chance of steady employment at a job with a decent salary. Otherwise they will drain more out of the system than they put in.
I was on Medicaid at one point years ago. I saw many people abuse the system. Parking in the hospital parking lot costs money, and so does a cab ride — but ambulance rides are FREE. It costs a Medicaid patient ZERO to see a pediatrician at his office, and ZERO to visit the emergency room. So why not take the free ambulance to the free emergency room when Junior has a tummy ache? Nobody with Blue Cross/Blue Shield would use an ambulance and the emergency room for a tummy ache or the sniffles, but people who aren’t charged anything WILL.
Our seniors will take more from the system, it is a fact. But for anyone to say they don't deserve it is ridiculous. They worked all their lives to be able to retire. They made their contributions into a system that was intended to be there for them at retirement. To now state they are draining the system and shouldn't receive medical care because they are no longer productive is ludicrous. That is no different than stating that someone who has a disability and isn't as productive should also be denied medical services! Perhaps as these seniors worked instead of putting money into a medical system that wasn't going to support them in the end should have been able to money into a system specifically for THEM – no one else! But they didn't have a choice and now you are going to suggest turning your backs on them. I am not yet a senior but approaching that age. While I was growing up, especially as I started working, those of us in the Baby Boomer generation were all concerned way back then about the number of people that would be retiring when we got there and the lack of funds in a government system to help support us. No one has the right to play GOD and decide whose life is more important than someone else's. Many of these seniors also have a secondary insurance and they are paying for those premiums as well as medicare premiums. Further, to assume seniors aren't productive – my parents are retired and in their 70's AND ARE STILL WORKING!
It is true, seniors did contribute to the system and were led to believe that it would provide for them. Unfortunately, that system was not economically sound and they did not contribute enough to cover the costs. The same is true of social security, but Medicare is the bigger economic problem (and we are at riak of making it bigger!). If either of these systems had been private insurance companies, regulators would have closed them down long ago a being fiscally unsound. A less kind word for it is a ponzi scheme. Sad but true.
I am part of the baby boom and I can see the charade that has been perpetrated. My concern is for my children who are going to have to foot the bill for my selfish fellow baby boomers who made the mistake of letting these programs get established, and did nothing in response to warnings over the years that they were unsound. It would be different if we had actually contributed enough to fund them, but we didn't. Shame on us.