How much of my wages goes to health care?

QUESTION: What percentage of middle-class Americans' wages goes toward health coverage? Even though I received a raise at work, my take home pay is less because of increased insurance costs paid by me.
-- Anonymous, Benoit, Ohio

ANSWERS:

Robert B. Reich, Clinton administration labor secretary:

Perian Flaherty

On average, about 17 percent of middle-class wages go to health coverage. But the average hides a wide variation. Workers who are older, who are less skilled, or whose employers don't provide health insurance or require them to pay a larger co-payment or deductible, pay more. Younger and more highly-skilled workers, whose employers bear a larger share of the cost, pay much less.

Arthur B. Laffer, 'Father of supply-side economics’:
Greetings to a fellow Buckeye. The answer to your question is difficult to quantify due to a multitude of factors that go into the calculation, including the definition of middle-class; whether the individual has health insurance; if so, whether insurance is provided by the employer, the government or the individual; the plan itself; the health of the individual; etc. Taking all of that into account, I hesitate to estimate what percentage of wages go toward health insurance, but I think it is fair to say that the number has risen over time as the increase in the price of medical care has been outpacing inflation and the products and services available to the elderly and sick have become a lot better and more abundant.

What is easier to determine than the percentage of middle-class wages going to health care is what is causing runaway health care costs. The problem is that government intervention in health care violates virtually every sound law of economics: We impose price controls, we make the services essentially “free” to consumers through over-insurance, we regulate entry and exit into the market, we have forced patients into managed care programs that are socialistic institutions, and we have government subsidies paying for more and more of the costs. The pricing system that in every other industry relies on Adam Smith’s “invisible hand” of the market place to equilibrate supply and demand is simply inoperative in the health care industry.

Furthermore, to call what we have today “health insurance” is really a misnomer. Most Americans have prepaid health care, not “insurance.” Insurance is supposed to be for rare major expenditures in order to spread risks among large populations. But most Americans’ insurance coverage has low deductibles and covers minor rather than major expenditures. That is precisely the opposite of how insurance should be provided.

Let’s be clear, though. Despite these inefficiencies in our health care system, it still offers the best quality of care in the world. Yet under a more rational health care delivery and payment system, Americans would be paying a lot more of their costs “out of pocket” and a lot less through government or private insurance, leading to the same great medical care at a lower total cost. Medical savings accounts are one way to put more competition and price sensitivity into the equation.

Bob McTeer, former Federal Reserve bank president:

Www.bobmcteer.com

Tell me about it. I’m not a health-care or health- insurance expert as are several of my colleagues at the National Center for Policy Analysis, including its founder and president, John Goodman. According to the Bureau of Labor Statistics, nearly 8 percent of employee compensation is in the form of health benefits. That is the percentage of employee compensation employers pay. If you add the employee portion of insurance premiums, co-pays and non-covered health care expenses to that, the total would likely be close to 10 percent.

While recent increases in the employee share seem large to us, I’m told that surveys show that employers still pay about 75 percent of the premiums in employer-based plans. Of course that doesn’t mean that employers bear 75 percent of the “burden.”  The incidence still falls mainly on employees since the employers’ cost is the same whether we get our compensation in the form of wages or benefits. Employer-paid health benefits have been a good deal for employees in the past because they haven’t been taxable as wages would have been. That advantage has been eroding in recent years as health care costs, and thus insurance premiums, have risen faster than wages or the costs of other goods and services, and forced employers to shift some of the rising costs to employees.

An unwinding of the employer-based system seems bad to those of us affected, but it may help the transition to a more rational system in the future since it inhibits needed portability of insurance.  Perhaps even more important, one of the main reasons the cost of health care has risen so rapidly is our system of third party payment, which makes health care at the margin seem free to its consumers. Moral hazard issues usually arise when purchases and payment are made by two different people.  Somehow, health care reform must include putting the consumer in charge of both sides of the transaction.

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