The picture above illustrates the increase in the cost of healthcare insurance for employer-supported plans under two different sets of assumptions. The lower of the two curves, in which average costs rise from the present $13,375 for family coverage to $24,180 over 10 years, assumes that the cost of insurance will rise at the rate they have over the last five years, 6.1%. The higher of the two curves, in which average costs rise from the present $13,375 for family coverage to $30,803 over 10 years, assumes that the cost of insurance will rise at the rate they have over the last 10 years, 8.7%. The graph was prepared by the Kaiser Family Foundation. The enclosing statement notes:
Even under the most optimistic scenarios, reducing the rate of increase in health costs will take time. This is why decisions about who gets subsidies and how generous subsidies will be in the health reform legislation now being drafted on Capitol Hill are so important. These decisions will determine how many people get help with their health care costs as insurance premiums and cost sharing become ever more unaffordable for average Americans. Projecting a family premium of more than $30,000 in ten years is simple arithmetic, but the implications for people and employers are real. Low and moderate income people are going to need some help paying for health care and health insurance as we learn which delivery and payment reforms work best and cost containment efforts ramp up.
I’m not sure I could come up with a more straightforward explanation of the sense of urgency I feel about healthcare reform. Unfortunately, the plans before the Congress do little to alter that grim arithmetic which is why I’m less than enthusiastic about them. In my view “universal coverage first, cost control later” is unrealistic.
As you might expect there’s plenty of crowing about this graph from the supporters of healthcare reform. For example, David Dayen at Huffington Post writes:
Very few families will be able to afford a $30,000 insurance policy. Even fewer companies will find a market for it. So their only choice will be to cut back on what the coverage offers, either with less benefits or lower amounts of coverage. More businesses will have to drop their coverage and throw their employees on to the individual market, driving costs up higher, as individuals aren’t bargaining collectively with insurers for lower prices.
Simply put, the private insurance market would cease to exist within 10 years, maybe a little more, on the current trajectory.
There are a number of points that need to be emphasized here. First, the figures show the growth for employer-supported insurance. The majority of such plans are self-insurance, administered by insurance companies which in fact bear no risk. The costs of the plan are equal to the costs of pay-outs plus (usually) a fixed cost of administration. Consequently, these costs primarily represent the rising cost of healthcare rather than just the rising cost of insurance.
Second, total compensation is equal to wages plus benefits. It’s hard to compare apples and oranges with these statistics. while healthcare insurance costs have increased at the rate of 6.1% per year, average wages have increased at a rate of less than 2% over each of the last 5 years. The median wages for a family are roughly $48,000. That means that healthcare insurance costs comprise roughly 20% of total family compensation.
That much of the increase in wages has come in the highest income brackets which only makes this point more serious.
Unless you believe that total compensation for average people will rise at rates that haven’t been seen in the post-war period, the sharp rise in insurance costs will mean that employer-paid wages will fall, fewer employers will provide healthcare insurance (which in turn means that total compensation will fall), fewer people will have healthcare insurance, or some combination. A drop in either wages or total compensation will mean there will be that much less to spend on everything other than healthcare insurance. Since healthcare employees fewer people relative to its size as a sector (that’s what it means when people say that incomes are higher in the sector), that means that the non-healthcare sectors of the economy will have less activity and, consequently, employ fewer people. That sounds like a vicious circle, i.e. positive feedback loop, to me.
Third, the article seems to make a common error in comparing the rate of inflation in healthcare to the general rate of inflation. It should be comparing the rate of inflation in healthcare to the non-healthcare rate of inflation. When healthcare was a much smaller proportion of the economy it didn’t make a great deal of difference but now that it comprises a sixth of the economy a 6% increase in healthcare costs are a whopping proportion of the total. Over the last 10 years general inflation rates have hovered in the 2-3% area. Energy and healthcare account for nearly all of that.
To my mind that strikes a fatal blow to the notion that increases in healthcare can be attributed to the general rate of inflation. You can’t have healthcare rising nearly an order of magnitude faster than the non-healthcare rate of inflation and blame the increases on the general rate of inflation.
I’m skeptical of the “increased technology” explanation, too, BTW. For that to be true capital expenses or the cost of pharmaceuticals and individual health appliances would need to be rising sharply and that just isn’t happening.
Whatever its sources, the numbers are pretty clear: the consequences of failing to stem the increase in healthcare cost will be very serious, indeed. And none of the plans the Congress is considering does that.
Update
The Wall Street Journal notices part of the first point that I made, too, albeit with a rather different spin:
The media’s “fact-check” brigade hasn’t noticed, but this is simply false. The Congressional Budget Office expects premiums for employer-sponsored coverage to cost about $5,000 for singles and $13,000 for families this year on average. “Premiums for policies purchased in the individual market,” adds CBO, “are much lower about one-third lower for single coverage and half that level for family policies.”
Similarly, the federal Agency for Healthcare Research and Quality finds that the growth rate for premiums is also lower for individuals over employers. Mr. Obama’s health team surely knows this dynamic, given that the CBO report was issued under the auspices of Peter Orszag, now the White House budget director.
One reason that individual policies are cheaper is that they generally require more cost-sharing by consumers. The reason that employment-based plans seem cheaper is that on average workers only pay 17% of the premiums directly if they’re single, and 27% for family policies, according to the Kaiser Family Foundation. Businesses pick up the rest by paying lower wages, thus hiding the real costs. Meanwhile, in the individual market, consumers pay with after-tax dollars because Democrats won’t allow individuals to have the same tax subsidy that employer policies receive.
This tax differential is the core of “our inefficient and inequitable system of tax-advantaged, employer-based health insurance,” writes Jeffrey Flier, the dean of Harvard Medical School, in a new commentary in the Journal of Clinical Investigation.
That doesn’t contradict the compensation point I’ve made above. But it does highlight why we should be taxing compensation rather than merely wages.
What about people selecting coverage that isn’t as comprehensive as they have currently? Isn’t there a point when people will select coverage that has a deductible (or a higher one) rather then pay for wall-to-wall coverage?
In my own case I could have saved a lot by going that route.
I’m not saying that is ideal, but it is a weakness of such studies. There is always feedback coming back into the system which they dont account for.
Looking at the graph, which shows a decrease in the rate of spending growth, makes me wonder where this money is going.
It reminds me of a lecture on inflation in an econ 101 course. A student asked “well, what’s in a ‘standard basket of goods?” And the answer, of course, is key to the numbers behind it: Prices on fish have gotten proportionally higher over the past 50 years, so lots of salmon in the basket would make the rate look higher; it would be ridiculous to say that in 1960 a computer would be in the ‘standard consumer basket of goods,’ but today, it’d be odd to exclude computer-related items.
So what’s in a ‘standard basket of healthcare’ today, vs. in 1999? I know that fees for physicians services (e.g. a check up) have gone up, but I don’t think that’s most of the increase. So what’s happening? Are we having more heart attacks (not very many)? Or is the cost of treating a heart attack (or cancer, etc.) going up? And what’s the additional value, if any, of this cost increase?
It depends on the state, Rich. In many states, particularly the most populous ones, state regulation prevents such plans from coming to the market and barriers to interstate insurance prevents people from buying into plans that exist elsewhere.
It will take a helluva lot of regulatory reform to make that something that most people can do.
Whether going to such plans will actually result in lower healthcare costs is something I’m skeptical about. It assumes that healthcare providers are willing to accept lower pay and aren’t in a position to raise their costs to cover whatever reductions occur.
Oh I’m sure it would have no effect on healthcare costs (I dont see that it would be a pressure on it at all – although… I wonder if profit margins are higher on policies with higher deductibiles. Does anyone know? If margins ARE higher wouldnt that be a modifying influence on insurance costs generally? Hmmm…I think thats an intersting question!)
Just thinking out loud.
http://www.aier.org/aier/publications/ejw_derc_sep09_whaples.pdf
Seems economists think reducing the barriers to getting into the medical field is a good way to reduce costs.
Bah, the money will magically appear, ask michael reynolds. And everyone gets a pony too.
Note that even the low growth scenario entails a doubling of health care costs for a family of four in just 10 years. Of course that’s just confusing theory for the real world (ask michael reynolds he can explain that one too).
Yes, problem is that people don’t want that. They want health care insulation–insulation from the costs of health care–along with being able to consume any and all health care resources they want. Look at the bills currently in Congress, this is what they do. They basically promise the universe and that it can be done cheaper than what we have now.
Politicians get up there and claim that once everyone is covered it will be cheaper, the public option will be cheaper, that we can save money by modernizing records so we can spend whatever we save on increased care. None of it is true. For example, suppose modernizing health records would save $100 billion a year. If you then spend that savings on increasing Medicare then you’ve saved nothing.
This is why Obama is a liar. He says, “Costs must be controlled, we have to bend the cost curve down, blah, blah, blah….but we’ll turn right around and spend those savings on the elderly.”
Obama says he is for competition and believes in markets. Another lie. Right now each state has different regulations on health insurance. This creates barriers to entry into the health insurance market. Instead of one national market we have 50 smaller markets. Firms already in a state have an advantage. They already know the regulations, the processes, Hell they are probably quite familiar with the regulators themselves.
This creates monopolistic competition which raises prices, reduces quantity, stifles innovation, and generally makes consumers worse off. Solution? Create a national set of regulations that would allow competition across the entire nation. If you can sell insurance in California you can sell it in Kentucky or Maine. Competition reduces prices, increases quantity, spurs innovation, and benefits consumers…its why businesses hate it. Much better to be a monopolist or at least monopolistic. Does any of the legislation do that? No.
Say what you will about the Republicans in general, on health care they’ve done good work in turfing Obama’s agenda. Not because the Republicans have anything better, but because the current bills suck ass.
I’m curious if anyone actually says that no reform is needed? It’s not a sentiment I’ve seen; the arguments seem to me to be about how to reform healthcare, and in particular how to control costs and ensure the best fit of coverage to needs.
I’m also curious, Dave, given your much greater knowledge (than mine) of the health care market, how much effect you think would be garnered by just these reforms, taken in combination: transfer healthcare tax deductions from corporations to individuals; remove barriers to competition across state lines; remove artificial barriers (especially the combination of overbearing regulation and government-enforced cartelization of medical care) that restrict supply. For this purpose, please ignore political feasibility, though clearly that wouldn’t be possible if such an approach were actually proposed.
One final thing, I do think taxing compensation is better than taxing income. Something even better, though, would be taxing wealth. Rather than taxing people trying to become rich, why not actually tax the rich? My understanding is that truly rich people tend to have relatively small incomes; it’s those who are upwardly mobile that tend to get hit by an income tax. My preference would be to only allow the government to tax real property, and then only property whose use is not regulated by that government. (For example, the Federal government doesn’t zone land, so it could tax zoned land, but a state that has zoning restrictions couldn’t tax the zoned land, as that would be a “taking,” and constitutionally prohibited.) Anyway, I’m more interested at the moment in your thoughts on the various alternative health care systems we could adopt then on the tax implications.
I’m not sure I could quantify the results, Jeff, but I think that those reforms would probably eliminate most of the problems with our current system. And I would favor them as my first choice in healthcare reform.
Unfortunately, “political feasibility” doesn’t begin to cover the brouhaha that would result from even putting such a plan on the table.
And I whined about the wealth tax issue when all of the hagiography of Teddy Kennedy was going on. My revisionist view of his tenure in the Senate was that he was the family’s guarantee that no such plan would gain any traction.
Anybody who opposes all of the politically possible reforms that can be cobbled together is de facto opposed to reform. That’s not hard to find.
For the entirety of my life politics for me has been a study in the sub-optimal. The market-oriented reforms you’ve suggested might well be my first choice but they’re off the table.
My second choice would probably be taxing healthcare benefits as income, means-testing Medicare, and some sort of regulations guaranteeing pools for high-risk people who couldn’t get healthcare insurance.
My third choice would probably be Wyden-Bennett or a reasonable facsimile thereof.
My fourth choice would be a sort of combination between Canada’s system and Germany’s—kind of a single payer system run by the states.
My fifth choice would be a system like France’s.
There is no number that characterizes what I think about the plans making their way through the Congress.
I’m with Dave. I think these reforms would go along way towards solving the problem with health care–the costs. It would also likely go some way towards solving the issue of coverage as well. After all, if coverage is cheaper, then more people will opt for it.
This would lead to the same problem that lead to Prop. 13 here in California. Suppose you pay off your house and now its assessed value is $500,000. Now your taxes would be based on that $500,000 each and every year. You might end up having to sell your home to pay your taxes.
Now if you limited it to something like, we’ll tax wealth, but only raise just as much revenue as we currently are via the income tax and other smaller taxes it might not be so onerous. But I’m thinking the elderly would run you out of town on a rail…if you’re lucky.
I remain unconvinced that federal trumping of state insurance regulation would offer material cost savings. We already have experienced a lot of consolidation in the insurance industry, as well as other industries. One has to at least consider whether encouraging national companies exasperates the problem of companies too big to fail. I notice the survey of economists linked by sam is decidedly split on the issue of whether state insurance mandates should be eliminated, but they seem to be more focused on whether special interest give-aways are driving up cost. To me the issue turns to whether eliminating state mandates would simply result in comparable federal mandates.
The focus on states appears to overlook the prevalence of local monopsonies. My insurer, which is based in the state, has negotiated some pretty good deals with the local hospitals, is an insurer from across the country at likely to do better? I don’t think so.
State regulation appears to be most problematic for the issue of portability, but so long as the system favors an employer-based system, I can’t expect any change. Why would an employer want insurance policies that provided portability when the employee left?
I’m not sure what you mean by consolidation. Do you mean mergers between firms or making regulations similar between states? Even if it is the latter, it can still be a barrier to entry and in a repeated game setting we could get an equilibrium where firms agree to stay out of each others market and eachs reaps the rewards. Also, gasoline has pretty simple differences between markets, but a slight disruption in the logistical chain can play havoc with the prices. So even a slight difference could still be significant. If it is the first one, well it should be obvious that reducing the number of firms reduces competition and that is not good for consumers.
Maybe…maybe not. As I noted each state is going to have its own regulatory process. I work in a regulated industry and I can tell you in other industries it would have the effect of being a barrier to entry. The incumbent has already run way the heck up the learning curve.
It would likely be an accounting nightmare, at the least. This is why getting rid of the special tax benefits of employer provided insurance would probably be the way to go…at least it would get one of the special interest groups out of the way.
As for the question its missing something, and replace it with what? I can imagine many economists thinking that doing away with the state mandates and leaving nothing in its place is a bad thing. So they’d answer in the negative. That would be what I would have thought when I first read the question: and replace it with what? Nothing, something at the federal level, etc.?
Contrast it with a relatively straight forward question such as payments for organs, over 70% of economists agree with that one. Similarly with removing barriers to entry in medical professions. Barriers to entry are rarely if ever a good thing as they are one of the primary tools for obtaining rents which are quite a bit like monopoly profits. Pretty straight forward question.
Jeff-I would be willing to try a plan as you suggest, but it should be realized there is no working model to show us if it will work to bring down costs. Remember that our larger states are about the same size as the smaller European countries which have much lower costs. In many states, we currently have one or two dominant companies. What stops competition there? It will not cover rescission and pre-existing costs issues. It will not touch Medicare which needs to be addressed.
Also, what are these overbearing regulations? How much do they actually add to costs? What country does not regulate health care at some level? How do you decide which ones to keep?
Steve