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The health-care and wages debate, continued!

Economist Austin Frakt is baffled that there's any controversy at all over the idea that health-care premiums eat away at wages. "The notion that premiums and wages offset one another has an impressive pedigree," he writes, naming a half-dozen peer-reviewed papers that have come to that conclusion and chiding skeptics for ignoring these studies without substituting any similarly high-quality research in support of their arguments.

This is, incidentally, why the Joint Committee on Taxation (the CBO of tax policy) thinks the effect of the excise tax will be to raise worker wages by hundreds of billions of dollars. According to their analysis, employers will choose more affordable insurance plans and shift some of that compensation money back into wages. It's not necessarily intuitive, but it's what history, theory and studies suggest will happen. And it is intuitive that if your work has to spend an extra $1,500 this year so you can keep your insurance plan, that you're not getting much of a raise.

By Ezra Klein  |  January 8, 2010; 10:27 AM ET
Categories:  Health Reform  
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The studies are essentially that if premiums in group plans go up, an employee's wages stagnate or go down. The studies don't prove the opposite, i.e. that if premiums go down, wages will go up. We have seen wages stagnate or go down in various jobs in the US overall due to trade trends, the lack of private sector unions and any other macro economic trend you wish to raise.

The sad truth is that anyone with a good PPO is brushing up against the excise tax. Obama and the Congressional Dems should be ashamed of themselves for supporting this when they lacked the guts to support the robust public option. The insurance mandate (yes, even with subsidies) is a shameful capitulation to the insurance industry and is a subsidy to their inefficiencies and greed.

I continue to wish this plan would die and we'd start from scratch with people who know how to negotiate. Reid and Pelosi should step aside, give the floor to Weiner and Grayson and let them take on anyone who stands in their way. The words the insurance industry fear the most are "Medicare for All." When David Brooks admits it makes more sense, you know that in a direct face to face debate, nobody can make the case for the monstrosity that is being organized in the Senate and the House, and anything the Republicans could possibly come up with from a private-sector standpoint.

Posted by: mitchellfreedman | January 8, 2010 10:43 AM | Report abuse

There are several reasons many of us don't believe this will result in income gains. One is the enormous unemployment level that will take years to work off, further putting downward pressure on wages. Two is that the tax will likely not result in a reduction in insurance costs, just a reduction in the amount of the increase. Third, we're living in an era when seemingly any wage gains, no matter what the profitability of the company, are only realized by the top 1% of earners while everyone else's real wages stay flat or fall.

Posted by: AuthorEditor | January 8, 2010 10:44 AM | Report abuse

"shift some of that compensation money back into wages"

SOME of that compensation. That's the first time you've said it that clearly. That's half the problem with this debate. You and others, in their zeal for making this case, have overstated the case. Perhaps trying to make too sharp of a point. But the language, as you suggested yesterday, has been unclear to the point of potentially being incorrect.

Posted by: wisewon | January 8, 2010 10:53 AM | Report abuse

Again this misses the point that this all buys into an over-utilization myth. So instead of spending money on premiums people now just spend it on health care, except premiums returned in the form of wages won't off set the higher deductible! Yea! We made people worse off!

Posted by: endaround | January 8, 2010 10:58 AM | Report abuse

Health-care costs at my company are certainly rising faster than my wages this year (~15% vs. a maximum of 3% raise).

Posted by: donhalljobs | January 8, 2010 11:04 AM | Report abuse

I tried to make this comment yesterday, but it got eated, so I'll give it another go. I got married last year and switched to my wife's insurance plan. My employer had been paying for 70% of my plan. I received back in my paycheck the 30% I was contributing, but not the 70% the company had been. Why? Why was that money suddenly not a part of my overall compensation? They took advantage of the fact that I was able to get them off the hook for paying for my health care and they pocketed that money. When I asked HR about it, I was given a blank stare.

Now, maybe this is a poor example. But it leads me to believe that employers will not be passing on their savings from health care reform to their employees; it will just feed their bottom line.

Posted by: mslavick | January 8, 2010 11:09 AM | Report abuse

Yeah, American employers have a sterling record over the last 30 years of generously sharing the benefits of productivity gains with their employees. That's why the statistics show such heartening increases in the wages of people in the working class and middle class. What, you mean they don't show that? Why, that would mean that the guesses of our economists that employers will share premium decreases with their employees is either contradicted by the historical record or exposed as a wild-ass guess. No, that couldn't be true. I'm sure that IF the excise tax changes behavior and IF premiums go down then the benefits will surely trickle down to the rest of us. Along with adorable white ponies.

Posted by: redscott | January 8, 2010 11:28 AM | Report abuse

This sounds as true as death panels. I nominate it for lie of 2010!

Posted by: obrier2 | January 8, 2010 11:32 AM | Report abuse

Mitchell Freedman's comments sum up the falsehoods being promulgated by the economists.

Ezra, did you like Health Savings Accounts? All of these economists you are citing love them. Why don't we admit this is just cost-shfting onto employees.

Where are the studies that demonstrate that when you cost-shift to employees health care costs go down? In fact, it only has a small effect on health spending. Employers have been cost-shifting to employees for 10 years now, and it has not stopped health care costs from escalating. That's because employees cannot affect health care costs.

And when you do cost-shift, employees will just as often put off necessary care as "unnecessary" care.

From GOoz news: At least six studies have shown that even modest increases in cost sharing reduce use of important medications for managing chronic disease;
One study showed a doubling of copayments reduced use of antidiabetes medications by 23 percent and blood control medications by 10 percent;
When employers double cost-sharing on cholesterol-lowering drugs from $10 to $20, 21 percent of patients stopped taking their medications compared to 11 percent in a control group;
Higher cost sharing for prescription drugs caused higher blood pressure, more emergency room visits and higher mortality, according to another study;
Higher cost sharing in another study led patients to reduce their use of crucial support services, which led to more hospital admissions; and
Use of mammography declined after increases in co-payment rates.

Posted by: kaylamom1 | January 8, 2010 12:26 PM | Report abuse

@kaylamom1: "That's because employees cannot affect health care costs."

That's an unbelievably ludicrous thing to say.

Posted by: ab13 | January 8, 2010 12:45 PM | Report abuse

Finally, the Economic Policy Institute, among others, debunks the idea that the cost savings employers receive from cutting back high value plans will actually end up back in workers' pocket in wage increases.

Economic Policy Institute president Lawrence Mishel takes apart that argument in a short, new issue brief.

First, even though unions often lament that in negotiations they face uncomfortable choices between protecting insurance and raising wages, Mishel argues that health insurance cost increases haven’t been big enough to greatly suppress wage growth:

The share of health care in total wages (in nominal, non-inflation adjusted terms) grew from 7.2% in 1989 to 9.4% in 2007, suggesting that the expanded role of health costs could have reduced wage growth by 2.2% over this entire 18-year period, or 0.12% each year....Further, overall benefits’ (health care plus all other fringe benefits) share of total compensation has actually been stable for the last 20 years or so....Hence, the story of stagnant wages in the U.S. economy is not one of growing non-wage competition.

Second, wages grew in the late ‘90s because productivity was increasing rapidly, and tight labor markets combined with a higher minimum wage pushed up wages. In any case, health care expenditures grew about the same rate throughout the ‘90s. Virtually no job creation and weak union or other institutional elevations of wages, not much higher healthcare costs, accounted for low wage growth in the 2000s.

Third, over several decades, low-paid workers have lost the most ground–but they’re also least likely to have employer paid health insurance. And in the late 1990s, when low-paid workers made their biggest gains, it wasn’t a result of health cost containment. Most still didn’t have employer-provided insurance. Finally, Mishel writes, “the worst wage growth in the 2000s was for low- and middle-wage workers, the groups with the least health care coverage.”

Posted by: obrier2 | January 8, 2010 12:56 PM | Report abuse

Oh ab13, why?

Posted by: kaylamom1 | January 8, 2010 1:00 PM | Report abuse

First the obvious bit (to an economist point of view): the insurance premium savings, to the extent there are savings, will indeed be available to support wages, but...wages still depend on the old classic equation of supply and demand. So, when demand for a type of labor is adequate, then insurance savings will indeed support wage gains or maintenance. When the supply of labor is over-abundant (now), such savings will go elsewhere.

Posted by: HalHorvath | January 8, 2010 1:31 PM | Report abuse

ah, yeah,'s becoming more obvious how smart Obama's entire approach to reform has been.

People are of course primarily thinking of their own personal bottom line outcomes, and...clearly this what the administration was considering, as they make choices and use their limited ability to sway.

In other words, Obama was pretty much done just about what is possible for an administration to do.

Posted by: HalHorvath | January 8, 2010 1:34 PM | Report abuse


You basically negogiated yourself a compensation cut. If you had gone to your employer ex-ante and said "I'm getting married... we're trying to choose which health plan to pick, and the choices are broadly the same at each firm. If you give me a raise equal to what you currently pay for my existing plan, I will go with my wife's plan" my guess is that you would have gotten that raise. Unless your employer simply likes having higher health costs (or I suppose he/she might say no if he/she believed you to be bluffing). Or you could have your wife do the same thing and have your respective employers bid.

What you did was akin to telling your boss "hey, it's nice making $60,000 but I would be perfectly fine working here for $55,000" and then seeing your pay cut. When you protest that "hey can I get a bit of that back?", you get a bewildered stare in return. Not only will employers only pay you want you are worth, they aren't going to pay more than they need to in order to keep you.

When economists talk about wages being determined by productivity, they are leaving out the supply side - the quantity of labor supplied is determined by workers' reservation wages (the lowest wage that a given person is willing to work for). Telling your firm that your current wage is above your reservation wage (by just accepting a large benefit decrease for nothing in return) is a great way to get your compensation cut.

kaylamom1/ab13 - Patients can't do a whole lot right now to reduce health care prices because they aren't the customer - the health insurance companies or the government is. The person or entity paying the bill is always

Posted by: justin84 | January 8, 2010 1:49 PM | Report abuse

To finish that last sentence, the person paying the bills is always the customer. Sorry, hit send just a bit too quick.

Posted by: justin84 | January 8, 2010 1:50 PM | Report abuse

"Oh ab13, why?"

Because employees/consumers can do quite a bit to control health care costs. The price of services is not the main problem, utilization is, and that is something employees/consumers have some control over. The problem is that when someone else is paying there is very little incentive to control utilization.

Posted by: ab13 | January 8, 2010 2:20 PM | Report abuse

A professor of mine once said that, if something doesn't make sense, one should be skeptical even if there is some evidence to back it up.

The idea of a 1:1 relationship between benefit cuts and wage increases does not make sense.

Posted by: bmull | January 8, 2010 2:58 PM | Report abuse

How does the idea of a 1:1 relationship between benefit cuts and wage increases not make sense? That's a really weird contention.

I can accept the argument that in the short term, there are a lot of employers who will pocket the difference. Ironically, that's one reason we need organized labor - they represent workers' economic interests far better than individual workers. I bet those firms which have strong union representation will be quite quick to bring workers' benefits up. Skilled workers should also be able to negotiate their salaries up. I'm worried about low-skill but low-union workforces.

However, I support capping the tax exemption. It astounds and pains me that organized labor and others can't see that the exclusion is poorly targeted - it benefits the rich more than the poor - and that it plays some role in increasing our health spending. Also, it will be difficult to pay for health reform without touching the exclusion. Some folks have it in their heads that we can simply tax the rich, but guess what, there aren't enough rich people. That income surcharge the House wants to pass could be used for other purposes.

Posted by: weiwentg | January 9, 2010 8:53 AM | Report abuse

The fundamental flaw in this whole line of thinking is that by capping the exclusion on health care costs from taxation that this will have a direct impact on health care spending.

Health insurance companies aren't going to magically start charging less for comprehensive insurance, because they don't want to have to pass on a 40% tax to their customers. And they're not going to magically start negotiating harder with providers to pay them less. They'll just keep doing what they'll doing, and the 40% tax will get passed on to customers in excess of the arbitrary limit.

What will happen is that employers will choose insurance that is not as comprehensive. In all likelihood, high deductible plans with HRAs or HSAs.

I assume you are making this argument in good faith, Ezra, but the reality of what you are arguing is that what really needs to change in the health care system is that individuals should have insurance that doesn't cover everything, and that they should pay more out of their own pockets, rather than relying upon premiums. Indirectly, people may neglect care when they are paying out of their own pockets, but that has problems of it's own, when people start delaying care because of the potential cost implications.

If you want to argue that insurance should cover less, then argue that. But I don't hear you arguing that, nor do I hear anyone arguing that, and I find that less than honest.

And while I don't doubt that employers putting money into health care expenses reduces wage increases, I totally don't buy the reverse, that if the increase in health care expenses decreases, then employers, out of the goodness of their hearts, will give the "health care dividend" to employees.

And really, that's besides the point. Because remember, all that's really happening here is that employees will likely be forced into high deductible plans, rather than comprehensive plans. The premiums will decrease, but I seriously doubt that the rate of growth will significantly decrease.

We have a choice of plans where I work, and I think about 40% of people are on high deductible plans. Our increase in premiums was still 15% this past year.

Even if people don't spend as much initially on high deductible plans, there will likely be high cost incidents that occur due to neglect, which reduces those savings... and I just don't trust the insurance companies to pass on any savings, even if there were any.

That's my take. Overall, I think you're doing great work, and I really enjoy your blog, but I think you're off-base on this one.

Posted by: MinnesotaBulldog | January 10, 2010 2:21 AM | Report abuse

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