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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
shareholders.”

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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Tom LeithRickDonald E.L. JohnsonMelowmarshBarry Carol Recent comment authors
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Peter
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Peter

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.

Tom Leith
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Tom Leith

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… Read more »

Rick
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Rick

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… Read more »

Donald E.L. Johnson
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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… Read more »

Melowmarsh
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Melowmarsh

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… Read more »

Barry Carol
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Barry Carol

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… Read more »

Eric Novack
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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… Read more »

Peter
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Peter

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… Read more »