POLICY: Health care and profits take a hack out of wages

The New York Times picks up on a story that’s been going on for a long time in America health care.  What’s happening is that the increase in real wages has all been sucked up by the added cost of health care benefits.  Back at at IFTF were used to have a chart which showed that real wages have gone up something around 2% from the late 70s to the mid-90s whereas health-care benefits had gone up something like 100%.The major difference now is that because the costs of health care are so much higher, the impact on wages particularly at the low end of the spectrum is much greater.  Funnily enough last week I got a notice in the mail from my health insurance company telling me that my rates would increase 20%. While I had the rep on the phone I asked when the other big rate increases would come based on my getting older.  She told me that essentially every five years, so when I turned 45, 50, 55 and 60, I would see a big bump.  My new rate is $120 a month for a $2500 deductible. If I was aged over 55, it would be something like $350, and if I was 60 and waiting for Medicare it would be nearer $500.  So even with a high deductible plan, we talking $6,000 in premiums annually for an individual policy.  When you consider that the average household income is less than $60,000, it goes to show that even at today’s rates the poorer half of the leading edge of the baby boom is going to have real trouble paying for a high deductible policy — and of course by the time you run the clock forward at the increases we’re seen, it will be even worse in five years time.

The Times story also picks up on the fact that productivity has increased but wages have not. Even when you count total compensation including health-care benefits they still haven’t kept up and more of the share of revenues is going to  profit. I cannot exactly claim to be a big fan of Tom Friedman.  After all he is the guy who justified the war in Iraq on the grounds that we were bringing democracy to the Middle East and frankly he reminds me of as a 19th century colonialist justifying the British Empire by saying that we are civilizing the native.  However, for better or for worse, he is the guy who’s popularized the notion of the earth being flat, and it is the downward pressure on wages and brought by the introduction of the Indian and Chinese labor force to the American economy that is causing the inability of American workers to grab their fair share of the increase in profitability.

But while health care benefits are keenly sought by employees, at some point they’ll realize that they don’t get the benefit of them directly, and that the ever upward spiral in health care costs is harmful to them. Of course the same issue is going on with the employers, and both sides have problems understanding what’s going on, or at least in coming to the obvious solution. Malcolm Gladwell has a New Yorker article looking a little at the history of this. It’s not particularly stellar, but it does have one great paragraph which explains why American business will fight every supplier to the last nickel but will let itself get raped year after year by health care, and not do the politically obvious thing need to stop it:

Under the circumstances, one of the great mysteries of
contemporary American politics is why Wagoner isn’t the nation’s
leading proponent of universal health care and expanded social welfare.
That’s the only way out of G.M.’s dilemma. But, from Wagoner’s
reticence on the issue, you’d think that it was still 1950, or that
Wagoner believes he’s the Prime Minister of Ireland. “One thing I’ve
learned is that corporate America has got much more class solidarity
than we do—meaning union people,” the U.S.W.’s Ron Bloom says. “They
really are afraid of getting thrown out of their country clubs, even
though their objective ought to be maximizing value for their

CODA: The cynic in me sees the export of health care services to India and China as freeing up more of the total revenue available for wages and profits. I wonder which one for those will get the lion’s share

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8 replies »

  1. Posted by: Eric Novack | Aug 29, 2006 5:07:30 AM
    “Peter- please tell us how you ‘self-insure’.”
    I take the monthly check that I would have given to Blue Cross and put it in a separate account for healthcare. If I need elective surgery I will go to Canada, Thailand, India, or Europe for about 25% of the cost and get a vaction thrown in. If I am put into hospital involuntarily I will use Lynn’s, “Smart shoppers suggestion for the uninsured #37.” to work out a rate I can afford and is reasonable.

  2. Couldn’t we just as well say “Health care and wages take a hack out of profits”?
    This is the old argument about what fraction of total value added is due to labor, what fraction to management, and what fraction to capital. I use the word due in both its senses here.
    If there were some kind of universal plan in place, the managers doing well would be less able to differentially attract talent: in a way, they want to be able to pay higher wages + benefits versus the managers who are doing less well. They prefer paying benefits versus wages because employees evidently value the benefit more than they do “equivalent” cash. Their employees are just as happy, but it costs the managers less to buy that happiness. And this is not due entirely to the favorable tax treatment either. If there was universal healthcare, management would have less ability to attract and retain talent except with more actual cash outlays.
    The unions haven’t wanted a universal system either: they want to be able to show people what union membership has done for them: “see, those poor non-union schmucks don’t get health insurance — aren’t you glad you have us? Look what we got for you!”

  3. There has been a trend in teacher union negotiations in Michigan to offer health benefits reductions in exchange for raises. In other words, if the union wants to keep the richer plan, the school district says no raises. Accept a little bit of cost sharing (real little; we’re talking introduction of a copay for office visits when there had been none, and drug copays going from $5/$10 to $10/$20) and the district offers 2.5 percent raises.
    The impact of rising healthcare costs is seen in everything we do and everything we buy. US auto makers redesign existing models with fewer features than last year. Why do you think that is? Every time you fly, the plane is full, the terminal is full, and all the airlines except Southwest, Alaska and Frontier are losing money, quarter after quarter. Why do you think that is? And now in our schools, where education is a labor-intensive, locally delivered service, we’re trading wages for health benefits before we even start asking what are we also not spending in the classroom?

  4. That rising health care insurance premiums have slowed the rate of growth in wages and salaries has been the untold story for more than a decade.
    And the role of markets in health care, which has been denied by health care “experts” forever, also has been clear for decades.
    It’s unlikely that any of this will change or can be changed by politicians (think of Global Warming. Man can’t do anything about it.) , but private employers can so some things, as noted in the comments above.
    We can do a much better job of selling what we do for our workers in the areas of benefits to our workers, providers and politicians. Better buying decisions will be made by employers and workers if they have better information and a greater understanding of how the health care markets work and their roles in them.
    A lot of politicians get it but choose to demogog health care rather than face the reality that there is little they can do to improve health care markets except get out of the way.

  5. I saw that New York Times article, too, and have the personal experience to substantiate it. The Chairman of the small company that I work stood before his employees at our annual benefits meeting last spring and said (paraphrasing here), “Because the company is absorbing the double digit increase in health insurance coverage, there will be no raises this year or cost of living adjustments to your wages.” O.K., I appreciate good health insurance, but, as the article reported, my wage increase assigned to health insurance this year has a devastating impact on my budget as I try to absorb increased food, energy, and gas prices.

  6. I agree with Eric Novack’s point about more clearly communicating to employees what their total compensation is. Indeed, many companies already do this via an annual benefit statement that lists both salary and the value of each benefit provided by the employer with total compensation listed at the bottom. It might also be useful if Medicare (and Medicaid) sent annual statements to each beneficiary listing how much it has spent on healthcare for that individual both by year and cumulatively.
    A point that Mr. Gladwell does not make in his article is the importance of market discipline. It is market discipline that finally caught up with the unsustainable pension and healthcare promises made by the auto, steel and airline industries years ago. By contrast, state and local governments provide gold plated health and pension benefits to both current workers and retirees. Their funding of these obligations is, for the most part, grossly inadequate, and, in some cases, non-existent. Many of these government entities had no idea of the actuarial value of the promises they have committed to. It is only how, with a new accounting standard (GASB 45) slated to take effect next year, that the numbers are being pulled together.
    If we ever go to full taxpayer funding of a basic healthcare package, I think it will be critically important to make sure the funding source or mechanism is as transparent as possible. If we went with a payroll tax like Germany does, perhaps supplemented by a dedicated value added tax, at least people would see and be able to identify how much their healthcare system is costing them. Presumbly, we would allow out-of-pocket upgrading to a richer benefit package beyond the basic offering for those who want it and can afford it.
    The other thing that is important to understand, I believe, is that there are significant cultural differences between the U.S. and Canada, UK and Western Europe. Those other countries provide a greater social safety net at the cost of a much higher total tax burden. Their economies are more stagnant, and their unemployment rates are considerably higher, especially among young people. Their model carries with it a clear tradeoff of more economic security and a narrower gap between rich and poor offset by less economic opportunity and slower growth. It is probable that the U.S., with its more dynamic and entrepreneurial system, would come down quite differently on that tradeoff, particularly with respect to the percentage of income we are prepared to pay in combined federal, state and local taxes.

  7. Peter- please tell us how you ‘self-insure’.
    Matthew- as I have said here many times previously, the first step to true healthcare cost transparency is the widespread dissemination of healthcare cost data — not from the provider side (though that is essential as well (though nearly impossible in the Medicare era due to thousands of codes and arbitrary values) — but rather through the simple change of having paystubs and w2 reveal clearly how much our TOTAL COMPENSATION is.
    A simple extra line or two on paystubs and your w2 would make workers better understand the costs of healthcare/insurance and make it harder for companies to play with healthcare benefits in such a way that total compensation would be decreased.

  8. Matt, I was in the same position as you, rate increase of 38% which included a change in age adder. My rate went to $273 for about your coverage. That, with disgusting service I got from BCBS last year, made me one of those healthy people insurance companies want, but who decided to become one of the unisured. I now actually self insure. As this goes on more and more will opt out, but also the sick ones, who actually use the system.
    As for the comment on the corporate “country club” mentallity overcoming good business decisions, I think Warren Buffet said it best, “If this is class warfare, my class is winning.” Trouble is their class only wins and party’s for a while. At some point the unsustainable lies catch up, off with their heads!