Will health care reform cause lower wages?

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)

33 responses

  1. Pingback: Will health care reform cause lower wages?

  2. This is a devastating study for many health reform options now under consideration, and there are troubling consequences beyond those you cite. For example, if health insurance costs continue to rise, effectively crowding out real wage increases, and if reform fails to address the income and payroll tax exclusion for employer-sponsored health care, then income and payroll tax revenues from most labor income will be flat or even falling for many years to come.

    The split of labor compensation as between taxable cash wages and non-taxable forms is one of the most important economic assumptions CBO and the Administration make when putting together their revenue forecasts. While Members of Congress and the press quibble over a tenth of a point more or less GDP growth, the real action in the revenue forecast is often the allocation of the income generated in the economy, especially the labor compensation split.

    Typically, as with most economic assumptions the labor compensation split is not revisited when legislation is analyzed. Yet the negative consequences could be very substantial for tax revenues, for the true extent to which the health bill is “paid for”, the financial health of Social Security and Medicare, and future deficits. Simply put, if health care costs rise more rapidly, then more and more of the nation’s income will fall outside the income and payroll tax bases. CBO should be clear what its assumptions are in this regard, and include in the costs of legislation any lost income and payroll tax revenue.

  3. Every thoughtful analysis that I have seen points out fatal flaws in the proposed plan(s). Are the conclusions of these studies getting into the debate somehow? Other than some of the CBO analysis, none of it seems to show up in the main stream media, with the exception of the Wall Street Journal sometimes (if one considers that main stream. I do, or maybe I wish.). Does this type of work find its way to congressional staffers? Is anyone paying attention?

    I believe that focusing on cost control should be the priority, if for no other reason than to avoid the impending Medicare disaster, everything else aside. Further I believe that the only practical way to control costs is addressing end of life costs. I have seen estimates that well over 50% of expenditures are incurred in the last several months of life. I realize this is a political lighting rod. Has anyone seen any good analysis on this subject?

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  5. Well, this study gives lie to the fact that if we had a nationalized healthcare system businesss would be more competitive and workers would enjoy higher wages. But, reality already confirmed this: the median income in the U.S. is several times higher than that in Britain and Canada, the two countries most cited as models to follow for socialized medicine.

    “I believe that focusing on cost control should be the priority, if for no other reason than to avoid the impending Medicare disaster, everything else aside. Further I believe that the only practical way to control costs is addressing end of life costs. I have seen estimates that well over 50% of expenditures are incurred in the last several months of life. I realize this is a political lighting rod. Has anyone seen any good analysis on this subject?”

    William, the best person to address “end of life costs” is you. Your doctor presents you with options, you go home to your family and discuss those options and determine what course of action to take. Having your government decide that for you violates the Constitution, what with those Equal Protection and Due Process Clause in there. :P

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  8. @Chris Bolts Sr.

    Chris,

    Good points about Britain and Canada. Add also that many Canadian’s come to the U.S. for treatment that they cannot get in Canada.

    Regarding your last point, I agree, except Medicare pays for it. So are you suggesting that the U.S. government should be obligated to continue to pay for unlimited care decided between someone and their doctor? I believe this is the most significant driver of overall costs. Can these issues be separated? For example, could you be free to decide but limit government’s obligation to pay?

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  10. I am a surgeon and can attest to the fact that end of life is the primary problem.
    This issue has also exposed the ignorance of Obama. The issue should be framed as one of compassion for those at end of life, not as taking pain meds for hip pain instead of having surgery. What a stupid ass.
    I believe his bungling of this single issue will destroy his presidency because it shows heart, and the heart of those around him.

  11. “I am a surgeon and can attest to the fact that end of life is the primary problem.”
    – – – – – –

    I’ve not heard anyone arguing the point, sir, but I’m a bit worried if our surgeons are only picking up in this now.

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  13. This is information that absolutely must be part of the debate. Regrettably, in my opinion the application of the word ‘debate’ to the political activity surrounding what is euphemistically known as ‘reform’ is at least erroneous, and more aptly fraudulent. There is no debate on the side of the advocates – there are only machinations aimed at selling the first stages of the long-term program, and then progressing toward the predetermined end result.

    The proponents of the currently proposed set of programs will not be deterred by this type of study. First, their knowledge of economics is colored by their politics, so that they won’t accept the eminently valid conclusions in this paper. Supply and demand are meaningless in this context. Second, the ‘universal coverage by mandate’ stage of universal coverage is only one step in the progression toward a single-payer system. Naturally, if one understands and accepts the conclusions of this study, one further concludes that a single-payer system will only exacerbate the effects described here. However, as I opined above, the players in this kabuki theater do not accept the conclusions of this study because of ideological limitations, and therefore will not only not be deterred by it, but will use it in their propaganda as further justification for the total nationalization of health insurance. “Health insurance costs are rising so fast that they are crowding out any income gains by lower-income workers. Therefore, we must eliminate health insurance costs for lower-income workers by dumping them on the backs of the ‘wealthy’ (aka the average American) through nationalized health insurance”

    Why is absolutely nobody making a case for reverting to the unfettered free market in health care and health insurance? There is nothing in the vast panoply of government interventions in this market that can truly control costs. Costs can be hidden and shifted, but the only effective means of reducing the growth of costs is competition and the discipline of the profit motive. Everybody acknowledges that having a payer between the consumer and the provider distorts the action of the market in only one direction, increasing costs. Nonetheless, there is hardly any discussion of remedying the current interventions, only exacerbating them (with apologies to Paul Ryan, et. al.). As much as such arguments will be resisted, they must be made and sustained if they are ever going to gain a foothold, and be in a position to take their rightful place when the new interventions prove disastrous.

  14. Originally Posted By bobby b“I am a surgeon and can attest to the fact that end of life is the primary problem.”
    – – – – – –

    I’ve not heard anyone arguing the point, sir, but I’m a bit worried if our surgeons are only picking up in this now.

    There is nothing in the good doctor’s remark that imply that this is new information to him.

  15. Yes, indeed, a devastating study. Of course, the proponents of the current incarnation of the health care/health insurance reform argue the same thing — the costs should be brought down. Their solution, of course, is an embedded public option, sure inevitably to crowd out private insurance, and then the “paradise” of a single payer system. Once we’re there, centralized health advisory boards and comparative effectiveness “experts” will start applying metrics for offering this care option, not THAT care option, (based on criteria such as we see in Britain, the so-called “QUALs” quality of life years remaining).

    Sound like a horror show? Sure does, because that’s what it is.

    Meanwhile, we need to think completely out of the box on this. We need to solve health care PROBLEMS, not think about reining in health care COSTS. Dean Kamen, he of the 400+ patents for medical devices, says that 30% of our health care costs are attributable to the chronic effects of Type II diabetes. Imagine if we found a solution to that problem as, say, Jonas Salk did for polio. Or we figure out how to control the growth of arterial plaque, or the inevitably inflammatory activity that accompanies aging.

    I am all for individual people making decisions on their own, and to really FEEL what medical care costs. After all, most people spend more time researching the purchase of a flat screen TV than they do selecting a doctor to provide a colonoscopy. Yet let’s not lose sight of what the real issue ultimately is — getting solutions to health care’s most devastating issues. Costs will then take care of themselves.

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  18. @William

    I agree that Medicare is the primary driver of healthcare costs. However, I think that one of the problems we are having with Medicare is that the government has created a level of expectations with our seniors that their care will be covered, regardless of cost. In fact, I think that the only reason that many seniors are now engaged is that they feel that Obama will indeed cut their Medicare benefits. I saw an interesting graph on Glen Beck from Rahm Emmanuel’s brother, Ezekiel. Ezekiel’s graph recommended that healthcare dollars be spent least on two groups of individuals: baby (when baby is age 0, he receives 0 benefits) and the elderly (it starts tapering off at age 55 and continues logarithmically until it hits 0). The seniors understand that they are the least productive in society and that socialized medicine is optimized for only those who will be productive.

    To answer your question, outside of shock therapy (completely severing Medicare benefits), the best course of action I think is to have the government work with the health insurance companies to begin to take over some of the Medicare beneficiaries and their costs. But what needs to start first is to educate people about the major problems with Medicare and Medicaid and why these programs need to be decoupled from the government.

    • Chris-

      You do know that Medicare does not cover all costs for medical care. To obtain coverage that begins to approach the level of covefrage under workers plans the receipent must enroll in supplemental insurance. What is covered and what is charged are all determined by Medicare. Then there the additional medicine policy. Already Medicare recipents have their services monitored and rationed. This plan just accelerates the process and eliminates things that help living more comfortably.

      As far as productivity, babysitting, volunteering and being consumers, seems productive to me.

  19. Even the worst case scenario hardly shows “dramatic shrinkage”. I for one would be happy so sacrifice 3% of my income if the result was. saving millions of families from medical bankruptcy. The effects of medical bankruptcy, 50% of all current bankruptcies, are catastrophic in terms of divorce, alcoholism, psychiatric disorder, suicide and teen delinquency. These problems drag down productivity and community standards. It often takes a decade or more for a family to recover from bankruptcy – if ever.

  20. @Chris Bolts Sr.

    I agree that Medicare is the primary driver of healthcare costs.

    A large part of that, though, is due to the fact that it covers the elderly, who by and large

    A)are the most expensive segment of society in terms of consumption of health care, and

    B)have net zero or negative contributions into the system (they’re basically living off of income transfer from the rest of society via FICA and so forth).

    I don’t see how you could change that, short of rationing health care for the elderly, making them contribute more (either in their productive years, or afterwards), or revolutionizing health treatment for old age (meaning to make the elderly more productive, healthy, and active in their older years).

    To answer your question, outside of shock therapy (completely severing Medicare benefits), the best course of action I think is to have the government work with the health insurance companies to begin to take over some of the Medicare beneficiaries and their costs.

    Why, so they can try and make the difficult choices on treatment for the elderly and take the heat for it? Medicare already has a far larger percentage of its funding going to treatment than any private insurer, and I don’t see how turning it over to the private insurers is going to improve the situation for them.

    In any case, the above isn’t going to happen. They tried nibbling at the edges with the Medicare Advantage plans, but those amount to little.

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