One More Time: Health Care = Wages

In an employer-provided health care system, health care benefits and wages are the same thing. Slate's Tim Noah made this point elegantly when he beseeched readers to drop everything they were doing and look at this graph:

Chart from the U.S. Department of Health and Human Services.

It's pretty shocking, and also easy to explain. The health insurance you get from your employer is is compensation -- it comes out of the same bucket as your wages. Dollars going toward your healthcare are coming out of your direct deposits. So when health care costs rise disproportionate to the growth of your company's compensation pool, wages flat-line. Ezra Klein takes this idea one step further with this graph comparing percent change in health care costs and median income growth. The conclusion is striking:


The correlation between the two data sets is -0.8, which is incredibly high for this sort of thing. To give you an idea, I also ran the correlation between GDP growth and median wages over the period: It was 0.7, which is to say that there was a weaker connection between economic growth and median wages than between health-care costs and median wages.

One reason that healthcare reform is an intrinsically hard sell -- especially when it comes with a lot of zeroes and a promise to cut popular programs to pay the difference -- is that Americans are spared the agony of seeing health care costs, except in the phantom limb of lost wages. We don't see health care inflation. We just see wage stagnation. And it's intuitively difficult to hold onto the idea that those sentences describe the same thing.

As Matt Yglesias pointed out the other day, the way we rely on employer-provided insurance creates a bunch of distortions. This whole post is excellent, but the beginning is especially clear-headed:

The idea of taxing health insurance benefits entails a lot of complexity, but in a general sense it comes down to a pretty simple question. Do you think that John, who earns $80,000 a year and gets an insurance plan worth $8,000 should pay more taxes than Jim who earns $70,000 a year and gets an insurance plan worth $18,000? After all, John and Jim are both getting $88,000 worth of compensation so it seems like they should pay the same in taxes. But under the current system, Jim pays substantially less. This has the effect of encouraging the Johns of the world, and their employers, to switch compensation packages from John-style "high wages, modest health benefits" to Jim-style "lower wages, better health benefits." In the Jim-o-verse, copayments are lower and you have more access to specialists. Then again, in the John-o-verse if you want to see a doctor you have more cash in your pocket with which to afford the copayments if that's what you want to do.

On the face of it, this is a no-brainer. Having the tax code encourage Jim-style compensation packages rather than John-style packages is a big economic distortion. What's more, by artificially subsidizing health care consumption by the relatively prosperous, it drives prices up for everyone, including the not-so-prosperous. And because it's a tax-side subsidy, the subsidy does little-to-nothing for the poor.