Americans have come to expect that their living standards will rise over time, and that their children will grow up to be better off than they were. Underpinning the American Dream is the growth in productivity—increasing output per worker per hour. A new study commissioned by the Coalition for Affordable Health Coverage (CAHC) by Sylvester Schieber and Steven Nyce† finds that health insurance premiums grew 2-3 times faster than productivity during the 2000s, absorbing a large and growing share of cash incomes in the process. Without steps to rein in runaway medical spending, rising health premiums will usher in an era of flat or falling living standards.
Among the study findings:
- If health costs continue growing at past rates between now and 2030, they will absorb roughly half of productivity gains for the bottom 60 percent of wage earners, leaving few resources to address massive shortfalls in Social Security and Medicare.
- If workers respond to the individual mandate in the Patient Protection and Affordable Healthcare Act of 2010 (PPACA) by enrolling in their employer health plans, the rise in employer costs will absorb more than 100 percent of productivity gains for the bottom 25 percent of wage earners—creating strong disincentives to hire or retain the low skilled.
- If the extra demand created by PPACA accelerates medical inflation, as happened during the implementation of Medicare in the 1960s, many workers will face the prospects of no pay increases in future years. In that case, the combined effect of rising health costs and addressing the shortfalls in Social Security and Medicare will cause household living standards to fall for the indefinite future.
For most workers, health benefits are part of the compensation package, meaning that when employer health costs increase faster than productivity, there is less left over for wage increases. Figure 1 shows that across most of the earnings spectrum, paychecks grew only one-third to one-half as fast during 2000-2009 as they did during the 1990s. Yet surprisingly, total compensation (which includes health and retirement benefits) actually grew faster in the 2000s. The wage slowdown of the 2000s was largely the byproduct of soaring health costs.
Figure 1: Compound Annual Growth Rates of Inflation-Adjusted Hourly Compensation for Full-Time, Full-Year Workers by Earnings Decile and for Selected Periods
Source: Steven A. Nyce and Sylvester J. Schieber, “Treating Our Ills and Killing Our Prospects, paper prepared for the Coalition for Affordable Health Coverage, Washington, DC, (July 2011), Figure 5.
Table 1 shows that rising health benefits have been consuming a growing share of wages—a phenomenon that is most pronounced for low-wage workers. By 2009, employer premiums at the bottom of the earnings scale were equal to half of cash wages, up from 38 percent in 1990. Over this period, employer health costs consumed an additional 5.4 percent of wages for workers in the fifth decile. When worker out-of-pocket costs are included, the effect is equivalent to a doubling of the employee share of FICA taxes.
Table 1, Health Benefit Costs as a Share of Wages for Full-Time, Full-Year Workers Receiving Health Care Benefits through Their Own Employer
| ||||||||
Decile
|
1980
|
1990
|
2000
|
2009
| ||||
1
|
15.4%
|
30.9%
|
38.1%
|
49.5%
| ||||
2
|
9.5
|
18.7
|
22.9
|
30.9
| ||||
3
|
8.0
|
15.3
|
18.6
|
25.5
| ||||
4
|
7.2
|
13.3
|
16.0
|
22.3
| ||||
5
|
6.3
|
11.6
|
14.0
|
19.4
| ||||
6
|
5.8
|
9.9
|
12.1
|
16.8
| ||||
7
|
5.4
|
9.2
|
10.8
|
14.8
| ||||
8
|
4.9
|
8.2
|
9.2
|
12.5
| ||||
9
|
4.3
|
6.9
|
7.8
|
10.2
| ||||
10
|
3.2
|
4.9
|
4.7
|
6.3
| ||||
_______________
| ||||||||
Nyce and Schieber for CAHC
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Labor market impacts
As health costs consume a growing share of productivity growth, premiums will exceed the productivity gains of workers at ever-higher levels on the wage scale. In theory, employers who maintain levels of coverage would need to give such workers annual reductions in pay. In practice, because wages are difficult to cut, this trend creates growing structural market barriers to hiring the low skilled. It makes no sense for employers to hire or retain workers whose pay and benefits are growing faster than their output.
For example, SSA projects that the average wage will rise by 3.7 percent in 2011, reflecting inflation plus productivity. This means a worker making $20,000 a year would see his total compensation rise by $744. Towers Watson estimates that employer health spending per active employee grew by $789. Extrapolating from empirical research, Schieber and Nyce calculate that health costs may have increased unemployment by two percentage points during 2000-2009. If so, the expected rise in health costs this decade will blunt the labor market recovery.
Effects of PPACA
Schieber and Nyce estimate that, depending on how employees respond to the individual mandate in last year’s health reform, between now and 2015, premium growth could exceed productivity growth for the bottom quarter of wage earners. Table 2 shows what would happen if all employees, many of whom currently do not participate in their employer health plans, responded to the individual mandate by enrolling in those plans.
Table 2, Share of Compensation Gains Provided in the Form of More Expensive Health Benefits Assuming Expanded Coverage Under PPACA is Paid by Employers Where Health Cost Inflation Rates Persist at Current Rates
| |||||||
Earnings
|
2009 to
|
2015 to
|
2009 to
| ||||
decile
|
2015
|
2030
|
2030
| ||||
----------------
|
----------------
|
----------------
| |||||
All
|
45.2%
|
41.9%
|
42.8%
| ||||
1
|
272.7
|
134.4
|
169.5
| ||||
2
|
136.8
|
87.5
|
100.0
| ||||
3
|
94.5
|
73.2
|
78.6
| ||||
4
|
71.2
|
65.0
|
66.6
| ||||
5
|
58.5
|
57.3
|
57.6
| ||||
6
|
47.1
|
51.4
|
50.3
| ||||
7
|
40.6
|
45.6
|
44.3
| ||||
8
|
32.2
|
38.9
|
37.2
| ||||
9
|
26.3
|
32.2
|
30.7
| ||||
10
|
16.4
|
20.3
|
19.3
| ||||
_______________
| |||||||
Nyce and Schieber for CAHC
| |||||||
These effects will multiply if expanded coverage results in an acceleration of medical inflation. CBO estimates that PPACA will result in the coverage of an additional 34 million Americans under a combination of public programs, health exchanges and employer plans. This growth in enrollment—roughly 11 percent of the population—has the potential to create scarcities that drive up costs for all payers. For example, a more modest increase in coverage under the 2006 Massachusetts reform has been associated with rising emergency room usage due to a shortage of primary care.[1] That law also appears to have stimulated significant private premium increases not seen in the rest of the country.[2]
Also likely to accelerate private premium inflation are provider reimbursement constrains under PPACA. Hospitals reported average margins of -5.2 percent treating Medicare patients during 2005-2009. Hospitals and other providers frankly admit they shift these losses by charging more to the privately insured. For example, during 2001-2011 spending per beneficiary under Medicare Parts A and B rose by 67.7 percent. Employer health costs per active employee rose 145.3percent—more than twice as fast. Medicare’s Trustees project that spending on Parts A and B would rise only 19.4 percent during 2011-2020, creating even more losses per Medicare patient. The Trustees also project that Medicare enrollment will grow by 30.5 percent during 2011-2020, expanding the population of loss-generating beneficiaries along with pressures to shift costs.
Table 3 shows what would happen if health costs grew six percent faster than productivity between 2009 and 2030. Between 2009 and 2015, health inflation could consume up to two-thirds of the productivity rewards of workers in the bottom four earnings deciles, and would absorb well over half of productivity gains for those in the fifth through seventh deciles. In the 2015 to 2030 period, health benefits inflation would consume more than 100 percent of productivity growth for the bottom 60 percent of wage earners. This scenario suggests that a significant increase in health inflation either will drive many more workers out of employer-sponsored health coverage or result in the elimination of their jobs.
Table 3, Share of Compensation Gains Provided in the Form of More Expensive Health Benefits Paid by Employers Where Health Cost Inflation Rates Increase Relative to Productivity Growth Plus Six Percentage Points per Year
| |||||||||
----------------------------------------------------------------
| |||||||||
Earnings
|
2009 to
|
2015 to
|
2009 to
| ||||||
decile
|
2015
|
2030
|
2030
| ||||||
----------------
|
----------------
|
----------------
| |||||||
All
|
42.6%
|
80.9%
|
71.2%
| ||||||
1
|
66.8
|
127.0
|
111.7
| ||||||
2
|
65.7
|
124.8
|
109.8
| ||||||
3
|
65.8
|
125.1
|
110.1
| ||||||
4
|
65.5
|
124.5
|
109.5
| ||||||
5
|
60.0
|
114.0
|
100.2
| ||||||
6
|
56.6
|
107.7
|
94.7
| ||||||
7
|
51.1
|
97.0
|
85.4
| ||||||
8
|
44.8
|
85.2
|
74.9
| ||||||
9
|
37.3
|
70.9
|
62.4
| ||||||
10
|
23.7
|
45.0
|
39.6
| ||||||
_______________
| |||||||||
Nyce and Schieber for CAHC
| |||||||||
Conclusion
Affordability is declining at an alarming rate. Health costs are the driving force behind the budget imbalances that now threaten our nation’s creditworthiness and the slowdown in wage growth that is eroding Americans’ confidence in the future. Soon, they could be producing ever-higher levels of structural unemployment. There is a large, and growing, need for market-based reforms that slow cost growth. Should Congress and the Administration fail to address the primary drivers of health cost growth, it is likely we will continue to see stagnation in jobs, wages and a substantial deterioration in our nation’s fiscal situation.
Summary prepared by Paul Hewitt and Joel White.
† Sylvester Schieber is an independent benefits consultant and former Director, U.S. Benefits for Watson Wyatt Worldwide and Chairman of the Social Security Advisory Board. Steven Nyce is Director of Corporate Research and Innovation, Towers Watson.
[1] Kay Lazar, “Many continue to rely on ERs,” Boston Globe, November 29, 2010,
http://www.boston.com/news/local/massachusetts/articles/2008/11/29/many_continue_to_rely_on_ers/
[2] John F. Cogan, Glen Hubbard, and Daniel Kessler, “The Effect of Massachusetts’ Health Reform on
Employer‐ Sponsored Insurance Premiums,” Forum for Health Economics & Policy 13, no. 2,
http://www.bepress.com/fhep/13/2/5/
Read the executive summary here.
Read the executive summary and the full study here.
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