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Lower health costs = higher paychecks


I've got an op-ed on the, well, op-ed page today. An excerpt:

In 2009, the average employer-sponsored health-care plan cost a bit less than $13,500. But virtually no one cut a check for $13,500. Employers generally pay more than 70 percent of their employees' health-care costs. To employees, that seems like a good deal, particularly given how fast costs are growing. A "benefit," as it's called.

But health-care coverage is not a benefit. It's a wage deduction. When premium costs go up, wages go down. When premium costs go down, wages go up. Yet workers don't know that. In fact, the information is hidden from them. That means that cost control seems like all pain and no gain, which makes it virtually impossible for Congress to pass. It's like asking someone to diet when they don't realize it will help them lose weight.

Cost control is not, in fact, all pain and no gain. It's some pain in return for a fat raise. A 2006 study, for instance, by Harvard's Katherine Baicker and Amitabh Chandra used malpractice payments to estimate the effect of premium increases on wages. They found that a 10 percent increase in health-care premiums "results in an offsetting decrease in wages of 2.3 percent" and an increase in unemployment of 1.2 percentage points. Compensation is basically a set sum for employers, and they don't seem to care much whether it goes into wages or into health-care costs.

Workers saw this in the 1990s. This was the era of the managed-care revolution, which most remember as a horrifying failure. Famously, audiences applauded when Helen Hunt broke out into a profanity-laden rant against HMOs in the movie "As Good as It Gets." The popular backlash was so intense that by the turn of the century the managed-care experiment was virtually over. The problem with this historic failure? The data showed the experiment to be a tremendous success.

From 1989 to 1995, median wages actually fell a bit. Then, managed care kicked in. Annual growth in health-care costs fell from more than 10 percent in the early 1990s to less than 5 percent in the late '90s. Meanwhile, wages shot through the roof, rising more than 11 percent from 1995 to 2000. Then we ended the managed-care experiment, and health-care costs resumed their normal speed of growth. Predictably, wages slumped back down from 2000 to 2006. "By every observable indicator," says Harvard's David Cutler, "managed care was a huge success. It cut spending, cut the growth of spending and didn't seem to kill anyone. And yet everyone hated it."

Of course they hated it. They didn't see its benefits, only its costs. They knew they were suddenly trapped in networks and being hassled by their insurers. As for their raises, those were nice, but why are you changing the subject?

When Americans rejected managed care, in other words, they didn't know they were ending wage increases, too. But since 1990, wages have tracked changes in premiums more closely than they've tracked the growth of GDP. Maybe if more workers knew that, they would be more interested in efforts to control health-care costs.

The column ends by summarizing some ideas that have already been rejected (Ron Wyden's Free Choice Act, Chuck Grassley's proposal to add health-care costs to W-2 forms), and proposes one idea that should be added to the bill: "attach health-care costs to each paycheck. If employers listed the cost of health care alongside the bite taken by payroll taxes, it would be much clearer to workers that health-care coverage was coming out of their wages, not out of their employer's largess."

One of the lessons of this health-care reform process has been that cost control is extremely hard, in part because few of the system's participants really see an upside. Neither workers nor Medicare beneficiaries nor Medicaid recipients feel the full cost of their insurance coverage. Clarifying the connection between the cost of health care and, say, wages, would do a lot to make clear that cost control isn't just sacrifice. It's a trade, and you get something in return. That, in turn, would make cost control an easier lift next time. And there will be a next time, and health-care reform should be designed to make it easier.

Photo credit: Ricky Carioti/The Washington Post.

By Ezra Klein  |  December 8, 2009; 10:24 AM ET
Categories:  Health Reform  
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Nice work -- it's difficult to make this stuff easy to read, much less easy to understand.

Posted by: Chris_ | December 8, 2009 10:31 AM | Report abuse

I agree with what you are saying, but my memory was of this time period was that managed care was being killed by liberal Democrats led by Ted Kennedy and Paul Wellstone. They used HMOs as a political weapon to bludgeon Republican politicians. Were they not responsible for the loss of some of the cost mitigation strategies used during the era of managed care?

Posted by: lancediverson | December 8, 2009 10:49 AM | Report abuse

"If employers listed the cost of health care alongside the bite taken by payroll taxes..."

Even better: eliminate the tax exclusion for employer benefits, add the insurance premium to gross wages then give *everyone* an above-the-line exemption for health insurance up to a specified limit (e.g. $8500 with an additional amount for high-risk occupations).

Even if we can't have universal coverage, we should at least be able to get universal tax treatment for health insurance.

Furthermore, that could be implemented immediately so that individual subscribers -- who will see rising premiums as a result of the risk burdens imposed on private carriers -- will get something tangible out of this whole non-reform.

Posted by: Athena_news | December 8, 2009 11:02 AM | Report abuse

Ezra makes excellent points on wages and health benefits. Ezra has been reading a lot of Jonathan Gruber lately I bet. All is not lost. Hegel would be upset here, but the pendulum is swinging in the favor of cost control... we may well be reentering a period of capitation and claims denial... akin to 1990s.

Posted by: RandomWalk1 | December 8, 2009 11:07 AM | Report abuse

I think that the fundamental problem in our healthcare system is that if there are 2 pills where one is 10% more effective but costs 4 times as much, we'll always pick the more expensive pill because we have no incentive to choose otherwise. We'll always pick the doctor over the nurse practitioner because we don't really have an incentive to pick otherwise when someone else is paying for it. At some point people need to care how much their healthcare costs and I don't think its going to matter if they see how much their employer is giving them. Perversely I think the higher that number is the more people will be happy with the current system.

Posted by: spotatl | December 8, 2009 11:10 AM | Report abuse

Between this and cap and trade you dems are toast!

Posted by: obrier2 | December 8, 2009 11:30 AM | Report abuse

Athena, who I believe is a progressive single-payer supporter, just advocated what is essentially Mike Enzi's health plan over the proposal at hand.

Why couldn't we have bipartisanship again?

Posted by: bmull | December 8, 2009 11:50 AM | Report abuse

Considering we will need to fix health care again, these methods to help people correctly perceive the actual situation, thereby providing real motivation for change and the destruction of fake arguments for the status quo, could be among the most important accomplishments for this first step.

Posted by: bcbulger | December 8, 2009 12:00 PM | Report abuse

I'm also on board for taxing health benefits. We could tax them at .0000001%, just so there would be a little box on everyone's W-2 that told them how much their benefits cost them.

Posted by: Brian5 | December 8, 2009 12:09 PM | Report abuse

Great collumn! As I remember it, employed based healthcare arose because of wage caps during WWII, so they really have always been wages. First they were funnelled into healthcare because employers weren't allowed to pass them directly on to employees, then they continued to be funnelled into healthcare because there was a tax incentive to do so.

Posted by: MosBen | December 8, 2009 12:12 PM | Report abuse

Ezra, this problem could be solved by one of the methods you described for making the cost to employees plain, but you say a coalition of unions and employers opposed it. I'm not sure I see what they gain and you simply dropped that bomb without explanation. (I know, space constraints.) So could you please explain?

Posted by: TomCantlon | December 8, 2009 2:27 PM | Report abuse

If this is the case, then why don't temp workers make more than salaried workers?

Posted by: goadri | December 8, 2009 4:02 PM | Report abuse

"[H]ealth-care coverage is not a benefit. It's a wage deduction." - Ezra Klein

Mr. Klein, with all due respect, you're dead wrong.

If an employer spends money to provide health benefits to an employee that amount is compensation. Take-home pay is only one part of an employee's total compensation.

Posted by: dturnerc | December 8, 2009 4:09 PM | Report abuse

It's also a tax on singles, young people, and people without families. They generally don't get paid more because their insurance costs less.

Posted by: mattmcknight | December 8, 2009 4:38 PM | Report abuse

I want to believe this, but the notion that if employers spent less on health benefits they would pass that cash through in wages flies in the face of experience. Employers cut wages and benefits any way they can -- that's how they make money. They've been cutting health every way they can as premiums rise: copays, deductibles, cost sharing. And wages have remained frozen.

When there is hurt in a system, the people with more power will push the hurt off onto people that have less power. That's an economic principle that agrees with experience, unlike all this theorizing. And that means that if you squeeze employers on benefit costs, they'll pass through the pain to the weaker party, the employees.

Of course there is no reason at all that employers should have anything to do with providing health care. That's a government job that a bunch of greedy profiteers refuse to allow the government to do.

Posted by: janinsanfran | December 8, 2009 5:15 PM | Report abuse

I am one of those American's paying $13,538 per year for medical insurance for my spouse and I, not including co-pays or deductibles. I am thankful to be able to pay for it. Due to a "pre-exsisting" condition we are not able to go and choose. Fortunately we live a frugal lifestyle and have made this purchase a priority. Many of our friends given the same circumstances could not afford insurance. Something has to change.

Posted by: jlorrainecox | December 13, 2009 3:54 PM | Report abuse

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