Inequality – The Income Gap and Spending on Health Care

This morning a friend of mine who owns a small company with 124 employees was told his health care costs are going up 30%. In the past few weeks a lot of attention has been paid to the idea that the "rich are getting richer and the poor are getting poorer." People are rightfully concerned about the "inequality gap" that is growing in America. It appears that the spending on health care and this gap are very much related. David Goldhill in his very informative book, Catastrophic Care discusses this connection:

"In the decade before the recession— 1998 to 2008— the American economy grew by 25 percent and corporate profits grew by 54 percent. Yet average wages grew by only 13 percent. Cast your mind back to those good old pre-recession days. Liberals and conservatives argued furiously as to why the American worker seemed to be doing so poorly. Was it because of tax cuts, declining unionization, deregulation, or globalization? But while the data are difficult to measure precisely, President Obama’s Council of Economic Advisors suggested an alternative leading cause: the explosion of employer health insurance costs. In its 2009 “Economic Case for Health Reform,” the CEA includes a chart which it says shows that the bulk of growth in compensation costs in the decade 1996– 2006 went to employer health premiums; in other words, spending on health insurance crowded out growth in wages. The CEA projected that more than 100 percent of the growth in future compensation could go to higher premiums. In other words, wages could actually decline over time to compensate for higher employer health costs."

David introduces us to one of his employees, Becky. He then goes on to break down her salary and benefits:

"Let’s say Becky’s work would be worth around $ 40,000 a year to us; if we can hire her for $ 40,000 or less, we’ll do it. What does hiring her cost? For simplicity, forget about all other benefits and costs for a moment and just focus on health care. Paying our share of Becky’s health insurance premiums will cost us about $ 5,000 a year. So the maximum salary our company will pay Becky is actually $ 35,000— the $ 40,000 her job is worth to us minus the $ 5,000 cost to us of her premiums. The more health insurance costs us, the less our company can afford to pay out to Becky or to any employee as salary or wages. Of course, all Becky knows is that her salary is $ 35,000."

David then goes on to analyze how much Becky will contribute to health care throughout her lifetime:

"Let’s assume that health care costs grow at only 2 percent a year— half of Becky’s income growth. This hasn’t been true for forty-five years, but we can always hope. Given all those factors, how much do you think Becky will contribute into the health care system for herself and her dependents over her lifetime? I’ll give you a hint: Becky will earn $ 3.85 million over her career.

The answer is $ 1.9 million!  Now also remember that $ 1.9 million was based on an assumption that health costs were somehow tamed below Becky’s income growth. In recent years , per capita health costs have actually increased 2 to 3 percent faster than income. If health costs grow merely equal to Becky’s income, Becky is looking at an additional $ 1.3 million in expenses over her lifetime— almost $ 3.2 million in total. In that scenario, Becky will contribute one out of every two cents she earns to our health care system."

 Back to my friend. At the beginning of the year, he was talking about raises for the people who work at his plant. With this 30% hit on insurance, that pool of money just dried up. So if you are wondering why we have an income gap and you are not getting a raise, I would recommend a discussion with the folks who are paying for health care on your behalf. The rich will have no problem in absorbing these costs. However, for the rest of us, we will all suffer a loss of income to pay for more health care, which is really sick care, but that is another topic.

 

Reference: Goldhill, David (2013-01-08). Catastrophic Care: How American Health Care Killed My Father--and How We Can Fix It (pp. 54-61). Knopf Doubleday Publishing Group. Kindle Edition.