In the Nation's Interest
Healthcare Costs, Wage Growth, and Inequality
By Joe Minarik
Over the last couple of months, we have talked about several of the hot-button issues driving U.S. discussion about economic policy these days, including both the progress of healthcare reform and economic inequality. In the course of those conversations, we noted that healthcare costs have a significant impact on both wage growth and inequality. That nexus is so important that its seems worth some thought on its own.
Our perception of “how we are doing” as a society is probably driven in at least some measure by the news we read about economic statistics. But how we feel is surely driven also by our own incomes personally. And both the cost of health care (including, but not limited to, health-insurance premiums) and the amount of our wage and salary income are key elements of both the news and our own pocketbook experiences.
On the pocketbook front, people understandably tend to take a somewhat narrow perspective. Many people – those who are basically healthy, and who have been under employer insurance coverage – likely judge their situations relative to a “baseline.” That baseline includes that they have insurance coverage that provides state-of-the-art care, with foreseeable out-of-pocket costs that are limited and manageable. The pocketbook question is then: With health care out of the way (perhaps “out of sight and out of mind” is closer), what is happening to my spendable income?
When people start with that attitude, they are oblivious to some of the most powerful economic forces of the last half century or so. They feel no particular gratitude – they don’t even notice – if their employers pick up most of the year-to-year increase in the tab for health care, by paying ever-higher health-insurance premiums. This is true even if the quality of that health care is rising. (And economists often point out that few Americans facing a serious health episode today would choose to save money by going to a 1960s hospital at 1960s prices, if that option were available.) We customarily and reflexively judge our well-being by what we have left over, after our health care is paid for. This tendency is of course strengthened in that healthy people typically assume that they will remain healthy, and so there is no particular joy felt from the payment of a premium for health insurance that we assume we will not need.
Put that together with a second mathematical regularity, which is that the price of a health-insurance policy is generally invariant with the income of the person buying it. There certainly have been luxury policies written for highly compensated employees, but such policies violate anti-discrimination restrictions in the employee-benefits law and so forgo tax subsidies. And recall as well that economists believe that workers ultimately pick up the tab for their health insurance (and other wage supplements) through reduced cash compensation. Apart from obvious considerations regarding their employees’ well-being, employers care only that their employees provide more value than the total amount of their compensation, and do not care how that compensation is divided among different categories. (Remember that all compensation is tax deductible to the employer.)
The bottom line of all this is that rapidly growing health-insurance premium costs have impinged significantly on both the headline accounts of how we are doing and on people’s kitchen-table perceptions of their own personal circumstances. Health-insurance premiums affect both because they eat away at the total dollars that employers have available to pay cash wages. Statistics on wage growth typically refer to cash pay, and hearing that wages are weak tells people that the economy as a whole is doing poorly. Meanwhile, people see that weakness reflected in their own cash paychecks, and their perceptions from the news are reinforced.
Furthermore, this phenomenon hits most painfully at workers at modest wage levels. Because the cost of a given health-insurance policy is the same regardless of the income of the worker, that cost is a higher percentage of the compensation of a lower-wage employee. And because premiums have been growing faster than total compensation for some time, they are now quite large relative to everyday wage incomes. The average employer-group family health-insurance premium in the United States is now almost $15,500 (shared between employer and employee). For a worker earning the minimum wage of $7.75 per hour over a 2,000 hour year, that premium cost is equal to the annual wage the worker would earn. To be economically attractive as an employee receiving health coverage paid for fully by the employer (usually the employer pays most but not all), such a worker would have to provide value about double the amount of his or her cash wage – before considering employer payroll taxes, and assuming that he or she would receive no other employee benefits. The conclusion would seem to be that the rising cost of health insurance is a major drain on household incomes.
Some would differ with this assessment – pointing out, for example, that low-wage workers are by far the least likely to receive employer coverage at all. Therefore, the argument would go, any perceived stagnation in wages at the low end of the employment scale cannot be caused primarily by the cost of employer coverage. That statement is true. But if the concern is for the well-being of that low-wage worker, then the rising cost of health care still will come out of his or her wallet – either through the cost of insurance coverage on the individual market, or a la carte if the individual is uninsured. Under the Affordable Care Act, more individuals will be eligible for Medicaid, and others will be given subsidies to purchase insurance. That is helpful in the short run, but if the cost of care overall continues to rise more rapidly than incomes and other prices over time, then those public programs and subsidies eventually will become unaffordable. There is no escaping the escalating cost of health care; either we will stop it, or it will stop us – or at least, our income growth.
The tie-in between health-insurance cost and inequality is just as clear. The economic-value hurdle that low-wage workers must surmount in order to be hired is raised by the cost of insurance, assuming that those workers do get employer coverage. So such workers might not surmount the hurdle, and as a result will not be hired and will drop to the bottom of the wage distribution. Others will be hired, but if (as usually is the case) their measured incomes are what they are paid in cash – rather than their total compensation, including the insurance premium – then they will fall closer to the bottom of the wage distribution because of the cost of health insurance. Meanwhile, the same health-insurance premium will have much less leverage over the cash compensation of workers at the top end of the scale, and so inequality will appear much worse because of the insurance cost.
Employers, of course, have responded to the rising cost of insurance by pushing most if not all of the cost onto their employees. That is the natural and economically rational thing to do. And that action has masked some of the impact of rising health costs on the well-being of workers – in reality, if not in the wage statistics. So, for example, employers have increased the share of the total premium that is paid directly by employees. They have reduced the cost of the policy by increasing the amounts of co-pays and deductibles. And they have dropped coverage for dependents, instead covering only the worker him- or herself. (This is if employers have not dropped coverage altogether.) Any of these steps would make the employer’s non-cash compensation look relatively smaller, and the cash wage look relatively larger. But all such changes would mean that more of the employee’s cash wage must ultimately go toward paying healthcare costs, rather than being available for other things.
Which takes us back where we started, noting that most of us tend to take both the cost and the value of our health care for granted, and to think of our income as being what is left over after those worries have been set aside. We cannot go on like this – at least not if we are to maintain our prosperity. There comes a time when the problems swept under the rug nonetheless fill the room. CED supports a system that makes individuals more cost-conscious – that gives people a reason to choose cost-effective health plans, without putting them at risk of unaffordable expenses should they become ill. We will continue to work to make that system a reality – for the working-age population and their dependents, and for the elderly as well.