Health Costs Soar Again (ho-hum)

Imagine the outcry if it came to light that the Super Committee had decided to increase Medicare taxes by three percent of payroll—not at some distant point in the more prosperous future, but this year, in the midst of an economic slump. Economists, right and left, would condemn such folly. Members of both parties would decry the devastating impact on families and jobs. Cable news would luxuriate in a 24-7 froth of controversy.

Okay, stop imagining. In fact, new payroll deductions of this magnitude did take place this year. Only it wasn’t the clamor but the silence that was deafening.

We’re referring to the 2011 Employer Health Benefits Survey, released on September 27 by Kaiser/HRET. The survey’s headline was that family premiums had ballooned by 9.5 percent over the past year. This $1,303 increase is equal to 2.9 percent of the 2011 average wage, as calculated by the Social Security Administration.

A common misconception is that employers pick up the health insurance costs of their workers simply as a matter of social obligation. In reality, health benefits are a component of total compensation paid by employers. One way or another, working households bear all of the cost of their rising health premiums.



Kaiser/HRET found that, on average, workers will directly bear 28 percent of this year’s premiums in the form of cost sharing. Most of these costs show up as insurance deductions from weekly paychecks. A growing portion, however, consists of higher deductibles and copayments by those employees who actually use medical services. At the margin, this form of cost sharing discourages the use of expensive care as though it were free.

The remaining 72 percent of premiums are “paid” by employers, who will deduct this expense, dollar for dollar, from wages. The hidden nature of these deductions makes it appear that wages are growing slowly and unequally. That is, this year’s $938 increase in the employer share of the average family health premium takes a bigger chunk out of the compensation gains of workers making, say, $30,000 a year than those making $80,000. The result is growing wage inequality even among the middle classes.

Of course, medical costs, which contribute the most to health insurance premiums, have been exploding for quite some time, which may help to explain why each year’s rising premium burdens are stoically borne rather than actively resented.

Below, however, we show what would have happened if premiums had grown only as fast as the economy—the ultimate arbiter of affordability. The average working family would have enjoyed an extra $31,438 in cash income during 2000-2011. Because these differences are compounding, the biggest consumption hit came this year. In 2011, the difference is $5,347. Imagine how the economy might be doing if this kind of spare change was rattling around in the pockets of 40 million households.

So where does it all go? Another urban myth holds that health plan profits are driving up costs. Check out this bombastic response to a (mere) 3.8 percent increase in federal employee health costs by civil servant Dennis Jameson of Anchorage, AK, as reported in the Washington Post:

“While an average increase of 3.8 percent doesn’t sound like much, I for one think it’s outrageous that Congress can freeze our pay, limit any job performance awards to next to nothing for two years and allow the largest insurance companies in the U.S. to increase our rates.”

Frankly, it’s nice to see a bit of pushback. But the truth is that “medical loss ratios”, which reflect the share of premiums that go toward medical services versus administrative expenses and profits, have held steady over the last decade. Insurers no more drive health premiums than real estate agents created the housing bubble.

At the root of our surging premiums and flagging confidence is an inefficient health system that contributes remarkably little to our national well-being, and which now may be dragging us back into recession. Vast productivity gains approaching 30 percent are well within the reach of American medicine. Yet so long as prices rise with impunity, there will be little incentive to pursue efficiency gains that would free up purchasing power for other goods and services.

As our recent Ways and Means Committee testimony underscores, Americans are sacrificing economic growth to a misguided national antitrust policy that condones price fixing in local health care markets.

Even in the worthy cause of deficit reduction, it is difficult to imagine any member of the Super Committee advocating a massive increase in payroll taxes by nearly three percent in the midst of a weak economy. Yet when soaring health premiums achieve much the same result, the national response is a sullen, deafening silence.

The Super Committee can and should reduce the deficit while sparking economic growth. That won’t be possible until we rein in the market excesses that have stymied productivity in our oversized and dangerously growing health sector.