Tuesday, December 8

Show them the money

Ezra op-eds:
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.
And adds on his blog:
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.
Hiding health insurance from wages and calling it a "benefit" serves no purpose other than to increase the power of health providers, insurance companies, unions, and to some extent employers.

Markets are dysfunctional without price signals. Bring 'em on!

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