I’ve often cited America’s health care industry as a factor in the slow growth of real wages for unskilled workers. In a recent Bloomberg interview, Anne Case (AC) and Angus Deaton (AD) make a similar point:
AC: One thing that hasn’t come up so far is the role that the health care industry plays in the low-skilled labor market. We tie people’s health insurance to their employment in a way almost no other rich country does. As health care costs have skyrocketed, employers look at a low-skilled worker and think, I really don’t want to pay my share on a $20,000-a-year policy for a working-class family, because this worker is just not worth that plus what I have to pay him or her in wages. We think the healthcare industry has a lot to answer for as well here in terms of destruction of good jobs for less-skilled people. . . .
AD: If you think of a $10,000 a year policy, which is for a single person, if that person works 2,000 hours a year, it’s an extra five bucks an hour on the wage. Think of all the fuss around the minimum wage. People don’t talk about this to the same extent, but it’s a horrible drain. It’s like tying dead weight to the less-skilled labor market.
So exactly what does the health care industry “have to answer for”? It’s not price gouging in the ordinary sense of the term. Rather their actual sin is lobbying for a set of subsidies and barriers to entry that make health care much more expensive than in a free market. Today, health care spending in the US has risen to roughly 17% of GDP.
This might not be a problem if everyone bought health care in proportion to their income. But that is not the case. As an analogy, in a free market, lower income Americans might buy a 3-year old Chevy compact car, whereas more affluent Americans might buy a brand new Mercedes. But that sort of rational behavior is heavily restricted in the health care industry, where regulation tends to prevent the provision of cheap and effective alternatives to our very expensive mainstream health care. Thus health care costs are an especially large share of the budget for lower wage workers, which reduces their living standards. Some of this is mitigated by various government subsidies, but not all.
As always in economics, don’t “follow the money”; you need to “follow the resource allocation”. Ultimately, our living standards depend on what we produce. The more labor and capital we allocate to health care (and to our almost equally wasteful education system), the less labor and capital is available to provide nice new cars, houses, restaurant meals, and vacations at Disney World. No amount of subsidies can paper over that problem. Nor does it help if the employer supposedly “pays for” your health care. If America devotes lots of resources to health care, then our consumption of other goods will suffer. There is no free lunch.
If America insists on an egalitarian health care system where everyone gets the same health care, then it should be a much cheaper system. I don’t want that sort of one-size-fits-all system. But if our current system doesn’t improve (i.e. get much cheaper), then the political pressure to move in that direction will be unrelenting.
READER COMMENTS
Dylan
Dec 20 2021 at 6:10am
Of course, that’s the unstoppable force. The immovable object is that the 17% of GDP is mostly made up of wages to Americans who have a strong incentive to lobby to make sure that their incomes don’t go down. The more we spend the harder it is to change the system, particularly if those changes are driven by the political process and not the market.
Scott Sumner
Dec 20 2021 at 1:42pm
Good point.
Alan Goldhammer
Dec 20 2021 at 8:11am
The first point – The Affordable Care Act was designed to address the shortcomings that Scott alludes to above.
The second point – I can tell you from first hand experience that running a health insurance system is complicated and costs can spiral out of control with one or two adverse medical outcomes. If you run a program insuring several thousand covered individuals and within this program there are two premature births with corresponding neonatal ICU costs the program can run a significant deficit. Even if the program is insured via a stop loss policy, it’s not uncommon for such losses to carry over into the next plan year with a new deductible that needs to be met. Even when one tries to account for costs by proper risk management, things sometimes go south.
Jon Murphy
Dec 20 2021 at 8:44am
And, consequently, has made things much worse (as evidenced by your 2nd point).
Alan Goldhammer
Dec 20 2021 at 10:05am
Jon – what you say is not quite right and a comparison of apples to oranges. Unfortunately, I am not at liberty to discuss the particulars. I would only note that when one actually is involved in the running of a health insurance program the difficulties become readily apparent, something those on the outside cannot see and as a result may not appreciate. It would be good if some of the GMU economists could be on the university committee that runs the insurance program, they would learn a lot.
robc
Dec 20 2021 at 10:22am
Why in hell would a university run an insurance program?
That is a rhetorical question, of course. But that they do is a large part of the problem.
Alan Goldhammer
Dec 20 2021 at 10:46am
They obviously contract the running of the program out but prudent organizations have a risk management group that tracks claims to make sure that they are not being over billed for premiums. You may think this is simplistic but I assure you after five years being involved on such a committee, it is not. Obviously, the large the pool the more the risk can be spread out. I’m on Medicare right now (and it is not free!) so I don’t have as much skin in the game LOL.
Matthias
Dec 25 2021 at 9:30am
Replying to Alan:
Despite your explanation of contracting out most of it, it still seems pretty silly for a university to run a healthcare programme.
In a saner world, you’d be just giving employees money, and they buy health care (and/or health insurance) as they see fit.
KevinDC
Dec 20 2021 at 11:27am
For what it’s worth, I worked as a senior healthcare economist with UnitedHealth Group before I went into consulting. I did indeed learn a lot from that experience, but pretty much all of what I learned and observed only reinforces what Jon was saying.
robc
Dec 20 2021 at 10:04am
Your 2nd point is why individuals should be insuring themselves, so that they are joining pools of millions, not pools of thousands with companies self-insuring.
And if the BCBS wasnt state specific the pool could easily be 100 million, I would guess. With that size, costs would be straight actuarial calculations.
That is my biggest problem with health insurance, it doesn’t work like insurance. I want health insurance to be more like home owners or auto or life insurance.
robc
Dec 20 2021 at 10:08am
It would be nice to just get a 50 year term health insurance policy at age 18.
Matthias
Dec 25 2021 at 9:36am
Yes, health insurance is a bit of a misnomer.
People want stuff like routine pregnancy care to be included. Which is about the most foreseeable expense ever, and has nothing to do with insuring a risk.
I suspect that might be more of a problem with inexact terminology, than with the product of offered. But I’m not sure.
I would certainly be nice, if you could buy health _insurance_ in the narrow meaning of the word insurance.
Philo
Dec 20 2021 at 12:21pm
“As always in economics, don’t ‘follow the money’; you need to ‘follow the resource allocation’.” This is a bon mot, which Sumner’s Boswell will surely want to record.
KevinDC
Dec 20 2021 at 1:02pm
I would make Deaton’s point more generally. He points out, correctly, that a policy of providing $10,000 in health care benefits is equivalent to $10,000 a year in forgone wages. But this isn’t true of just health benefits, it’s true of all benefits. Pushing to legally mandate greater parental leave coverage, for example, necessarily means pushing to legally require lower wages for everyone, for “benefits” that not everyone wants. When I first got into the health care realm years ago working at the Medical University of South Carolina, my online employee profile had a section where it showed your pay information, including wages to date for the year. I remember after my first year, it also showed something to the effect of $15,000 a year in “benefits provided,” and then added that to my wages to show what my “total compensation” had been. And I remember thinking, I would have really rather just had the $15,000.
This is particularly true for people who are young, where the extra cash early on can be crucial for things like paying off student loans, or saving for buying a house, or really anything that you need to get yourself established in the world. The greater the push to mandate lower wages in place of higher benefits, the harder these laws are making it for the younger generation to be able to start standing on their own two feet.
What I find maddening about it is how this was explicitly part of the logic of the ACA. In a sensible world, people who are young and healthy with very low health risks would be able to buy simple health insurance at low cost that covers low probability, high impact events. But policymakers decided that young, healthy people can’t be allowed to buy such policies. Instead, they must buy policies that cover far more than they need, to subsidize the costs of the older (and much wealthier) population. Make the younger, low wealth person give up $15,000 in wages for a policy they’ll get maybe $2,000 in actual benefits from, so the older, higher wealth person can get more benefits than they’ll pay for. That makes no more sense than saying a low income person who drives an inexpensive car in a low risk town needs to be charged extra on his car insurance to subsidize a rich person who drives an expensive car in a high risk city.
Alan Goldhammer
Dec 20 2021 at 1:57pm
This is not quite true. Both of my daughters were on ACA policies when they worked for a time as independent contractors around 2012 or so. One had a policy for two years and the other for 18 months. The policy premiums were between $250-300 per month. That is pretty low cost in the scheme of things.
It’s also important to note that things don’t get cheaper once you go on Medicare. Premiums are adjusted for income with four tiers. When you add on a Medigap policy the price goes up. My wife and I pay $297/month apiece for Part B (it’s going up to $340/mo this coming year). We get the drug benefit from my former employer so we don’t pay for Part D but that’s also an added monthly premium on top of Medicare. I always laugh when people talk about free health care for the elderly!!!
Henri Hein
Dec 20 2021 at 4:28pm
It was true in my case. I had a health care plan that I liked. ACA took it away from me, despite Obama’s promise. I had the same reaction as KevinDC. If they goal is to get more people to sign up for insurance, which I thought it was, why target the cheap, attractive plans?
robc
Dec 21 2021 at 8:23am
Same here.
I was self-employed just before and after ACA went in to effect.
I was paying something like $50ish dollars per month for my policy. It jumped up after ACA went in, primarily because I suddenly had pregnancy coverage. Which was unlikely as I am male.
The plan changed more later on, as it was just flat out illegal under ACA. I knew Obama was lying, but he deserves to be called out on it again and again for saying if you like your plan, you can keep it.
BTW, the reason it was so cheap was that I was a relatively young, healthy, single male. And it was a high deductible HSA plan. It was a 0%/100% plan, I think those are entirely nonexistent now. After reaching deductible, I paid 0% on everything thereafter. All of my employer paid for HSA plans have been 20/80 or 30/70 after reaching deductible.
KevinDC
Dec 20 2021 at 4:39pm
That doesn’t actually contradict what I was saying. My claim was not that “young people pay higher premiums than old people” or anything like that. And saying the premiums your daughters were paying were “pretty low cost in the scheme of things” also misses the point – low cost in the current scheme is still much higher than it needs to be. (Also, my point was largely focused on foregone wages, not the premiums being charged, which is a pretty gigantic distinction, but we’ll just ignore that for now.)
Imagine a parallel world where every homeowner was required to have flood insurance, regardless of whether they wanted it or not, and regardless of the actual risk of flooding they face. Imagine further that the law also said that the premiums flood insurance companies charge people who live in low risk areas can’t be any less than one third of what they charge to people who live in areas with a high risk of flooding. (This mirrors a rule out of the Affordable Care Act – it’s illegal to charge young, healthy, low risk people any less than one third of what you charge older, higher risk people.) And further suppose that people who lived in areas with high risk of flooding tended to be disproportionately wealthier than those who live in low risk areas – people with beachfront property and the like. This would be a terrible and inefficient scheme for flood insurance, and it would result in low wealth, low risk people being overcharged to subsidize wealthier, high risk people.
In that world, a parallel version of Alan Goldhammer could still say that his children who live in a low risk-of-flooding area still pay less for their flood insurance than he does in his high risk area, and even that the cost they pay for their flood insurance is “pretty low in the scheme of things.” That would be true, as far as it goes, but it doesn’t do anything to undercut the arguments for why this is a really bad system, particularly for younger, lower income people.
David S
Dec 20 2021 at 5:29pm
The crazy flood insurance system you describe is basically what we have in the United States. Our tax dollars support FEMA, which subsidizes protection (and rebuilding!) of high risk properties in flood zones—regardless of income for the most part.
I think Alan’s larger point is that major costs in the U.S. medical system are influenced by edge conditions. This applies to both the regulatory capture of insurance premiums and services for ultra high-cost exotic treatments. It allows vermin like Martin Shkreli and the Sackler family to thrive at the expense of everyone else.
KevinDC
Dec 21 2021 at 12:10pm
Oh I’m aware of our really bad FEMA policies, I was just ignoring them for the sake of the thought experiment.
That was indeed the point he made in his initial comment although I, like Jon, think that problem was made worse rather than better by the ACA. But in Alan’s reply to me, he denied that it was the case that the ACA overcharges young, low risk, low wealth people to subsidize older, high risk, high wealth people. And he’s mistaken on that point – the architects of Obamacare were very explicit about this being the case.
The purpose of the individual mandate, which penalized people for not buying health insurance, was to address this. In crafting the law they realized, correctly, that overcharging a low risk population to subsidize the high risk population creates an adverse selection problem. The lowest risk people would just drop out of the market rather than be overcharged, which pushes prices up even more for those who remain in the market, which causes more low risk people to drop out as well, further pushing up prices, etc. Policies requiring health insurance and pushing for more expansive benefits rather than cash compensation for the young were justified as being necessary to prevent an adverse selection spiral, because the system was purposefully designed to overinsure and overcharge young, healthy, low risk people.
Matthias
Dec 25 2021 at 9:42am
Don’t be so quick to condemn Martin Shkreli.
Matt Levine’s Money Stuff had some good pieces on him over the years. It’s a bit more complicated.
You are right however, that the system that suppresses competition is pretty bad.
robc
Dec 21 2021 at 8:28am
250-300 seems high, not low, to me.
In the 2009-10 time frame, I was paying between $50 and $60 per month. It didnt cover pregnancy, but did cover disaster, which is all I needed.
Thomas Lee Hutcheson
Dec 20 2021 at 5:18pm
Pricing health insurance by age does not make much sense since age is not a decision variable. All the insured will get older, so having taxes pay now or later is much the same. Better put everyone in the same pool.
KevinDC
Dec 21 2021 at 10:50am
It’s true that age is not a “decision” variable, but it doesn’t follow from this that therefore pricing health insurance by age doesn’t make sense. In the real of auto insurance, teenagers pay more (all else equal) than a thirty five year old would, because teenage drivers are riskier than middle aged drivers. If you were working for an auto insurance company and told them they should lower rates for teenage drivers because their age isn’t a “decision variable,” they’ll just look at you funny. The price of insurance isn’t (or shouldn’t be) about “decision variables,” it’s about the risk of what’s being insured. In auto insurance, youth is a high risk. In health insurance, youth is a low risk. In both cases, adjusting pricing for age makes perfect sense.
Except paying now or later isn’t the same at all. As I mentioned in my initial comment, when you’re young, being able to get an extra ten or fifteen thousand dollars in wages is extremely beneficial, particularly when you’re just getting started in the world. It would make it so much easier for the younger generation to deal with student loan payments, save up for buying a home – things like that. Laws which are requiring greater percentages of compensation be given out in benefits rather than wages, and that the benefits need to be ever more comprehensive (and expensive), are disproportionately burdensome on younger people struggling to become independent. I’ve had defenders of this system tell me in response “Sure, while you’re young you’ll be overpaying, but as you get older, you’ll benefit from the other end when the new younger generation is overpaying and offsetting your costs.” I have a hard time imagining how anyone can possibly feel good about that. I don’t want my kids, or anyone else’s kids, to be made worse off just as they’re trying to get themselves set up in the world, so I can benefit at their expense. That seems incredibly selfish, and lacking in empathy.
The point isn’t what “pool” they are in, it’s whether or not what they contribute to the pool reflects what they’ll be taking out of it. A system where the low risk and low wealth population is required to disproportionately contribute for the benefit of high risk and high wealth people is both inefficient and unfair. I’m no fan of egalitarianism, but even I think it’s crazy to have a system that taxes the less wealthy population for the benefit of the more wealthy population.
steve
Dec 21 2021 at 3:57pm
So simplifying your argument, people should just pay their own medical costs. Healthy people should not contribute to the costs of the sick.
Steve
KevinDC
Dec 21 2021 at 7:11pm
No, that’s not an accurate summation of my argument. To see why, just look at it from the car insurance analogy I’ve also made. If there was a policy that required low risk, low wealth drivers who lived in safe areas be charged extra on their insurance to subsidize the insurance of high wealth, high risk drivers who drive expensive cars in risky areas, I’d oppose that policy for all the same reasons previously mentioned. But it would be odd to summarize that position as “So basically, you think everyone should always pay for their own crash repairs, and people who don’t need repairs shouldn’t contribute towards people who do.”
steve
Dec 21 2021 at 8:36pm
I think I understand the principle you are espousing I just dont see how you do it practically. Unless you put people of the same risk in the same group some people end up subsidizing others if you want to think of it that way. The more you make the risks similar the more you make it so that people are paying their own costs.
Steve
robc
Dec 21 2021 at 10:22pm
Doing it is easy, you hire actuaries.
KevinDC
Dec 22 2021 at 8:52am
The practical details can be handled by the insurance companies themselves – they have every incentive to work out how risky customers are and price them accordingly. And in most insurance markets, they do handle the practice details just fine, because not all insurance markets have as many laws and regulations restricting the ability to price to risk like health insurance does. I don’t have any particular method in mind that must be used – but the companies that are better able to more accurately price customers to risk will naturally do better than others.
I will make note of two methods that are used, however. One of the difficulties of insurance is asymmetrical information – I know more about myself than the insurance company does. But they have a method that encourages people to sort themselves according to their own knowledge – giving customers options about what their deductible will be. If I have a reason to believe I’ll need to make frequent visits to the doctor (or I expect I’m likely to need frequent car repairs, in the case of auto insurance), I’m very likely to prefer a plan with a low deductible, in order to minimize my out of pocket costs for every use of the policy. Choosing this also signals to the insurance company that I think I’m particularly likely to need to use the policy, and plans with low deductibles and low out of pocket costs come with correspondingly higher premiums. People who know themselves to be low risk and think it’s unlikely they’ll need to use the policy and pay the out of pocket costs, by contrast, will tend to prefer policies with lower premiums and higher deductibles. So offering different levels of deductibles and premiums is one way to get customers to self-sort from the start.
The second method that comes to mind is direct investigation. I applied for a very large life insurance policy. In order for that policy to be approved, the insurance company required that I undergo a physical exam to get some basic measures of my health. This is a simple and straightforward mechanism for life insurance, but current laws and regulations have severely limited similar methods to assess risk for health insurance.
These are just two of a number of methods that can be used. Laws and regulations which limit the ability to accurately assess risk, or to price accurately for risk, will have the effect of creating an adverse selection effect in the market, which I rambled about in greater detail in an earlier comment.
Joel Pollen
Dec 22 2021 at 11:32am
Steve, I see what you’re saying. You’re right, insurance companies have to use the premiums of healthy people to pay for the bills of sick people. But on another level you’re mistaken.
You say, “The more you make the risks similar the more you make it so that people are paying their own costs.”
Underlying this statement is the premise that insurance is zero-sum, and only does something to the extent that it takes money from low-risk people and gives it to high risk people. But that’s not the case at all. You can run a home or auto or life insurance company that covers only homes or cars or people with low risk (however that’s defined), and yet charge acceptable prices and still make money. The insured person’s monthly premium is the expected loss from the covered event in that month, plus extra on top for the insurance company. People are willing to pay more than the expected loss to get rid of the risk.
By analogy, if I offered you a coin flip where heads would earn you $1 million + $1 and tails would lose you $1 million, the expected value is positive, but most anyone whose net worth is not several times $1 million will pay to avoid taking the flip nonetheless. In a world where taking the coin flip is obligatory, a company could profit by taking these obligations from people (since they have positive expected value) as long as they had sufficient cash to cover their expected losses. That’s why insurance is a profitable, not profitable because we somehow trick low-risk people into overpaying for insurance.
Matthias
Dec 25 2021 at 9:45am
Insurance doesn’t require pools to work.
Actuaries can work out your risk and price it, even if you were the only person around.
That’s what insurance companies do for crazy one off risks, too. Or what banks do when they price derivatives.
No pools required.
Pools are a useful tool when your actuaries don’t know what they are doing. Or, when the law requires them.
Thomas Lee Hutcheson
Dec 20 2021 at 5:07pm
It has been very difficult to shift the US system for subsidizing health insurance away from employee “provision.” ACA made only tiny steps in that direction. Ideally everyone would purchase their own policy using a tax credit financed by a consumption tax. Having employers “pay for” people’s health insurance just piles more disincentive to employment on top of the wage tax that go to (inadequately) fund SS and Medicare.
steve
Dec 20 2021 at 7:49pm
“cheap and effective alternatives ”
You can have cheap and effective if you limit access. You can also have cheap and unequally effective care.
Steve
Jose Pablo
Dec 22 2021 at 8:05pm
Regarding the “17% of the GDP figure for health care expenditures” and the “impact on the wage stagnation” mixed up in the same post. A couple of fact-based inputs that are (maybe) relevant:
In 2020 the actual figure was 19.7% of GDP (granted due to an increase in cost related to Covid-19 and a reduction of GDP)
Of this figure, only 17% was sponsored by private businesses (3.3% of GDP)
And only 24% was related to employer-sponsored private insurance (once employees’ contribution is taken into account). 4.7% of GDP
50% of the cost was sponsored by the Federal (36%) and state and local (14%) governments.
The share of the cost sponsored by the Government has been increasing over time.
https://www.cms.gov/files/document/highlights.pdf
So,
health care cost impact on private employment costs is not a “20% of the GDP kind of problem” but more like a “3.3% of GDP kind of problem”
It is, already, a diminishing problem. We are “socializing” the healthcare costs at an increasing rate (which, by the way, should be great news for healthcare providers. They margins will increase with this “new sponsor”. After all, it is an agent and agents are way less careful that principals as far as spending money is concerned).
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