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May 16, 2013

Labor Costs, Inflation Expectations, and the Affordable Care Act: What Businesses Are Telling Us

The Atlanta Fed’s May survey of businesses showed little overall concern about near-term inflation. Year-ahead unit cost expectations averaged 2 percent, down a tenth from April and on par with business inflation expectations at this time last year.

OK, we’re going to guess this observation doesn’t exactly knock you off your chair. But here’s something we’ve been keeping an eye on that you might find interesting. When we ask firms about what role, if any, labor costs are likely to play in their prices over the next 12 months, an increasing proportion have been telling us they see a potential for upward price pressure coming from labor costs (see the chart).



To investigate further, we posed a special question to our Business Inflation Expectations (BIE) panel regarding their expectations for compensation growth over the next 12 months: “Projecting ahead over the next 12 months, by roughly what percentage do you expect your firm’s average compensation per worker (including benefits) to change?”

We got a pretty large range of responses, but on average, firms told us they expect average compensation growth—including benefits—of 2.8 percent. That’s about a percent higher than the average over the past year (as estimated by either the index of compensation per hour or the employment cost index). But a 2.8 percent rise is also about a percentage point below average compensation growth before the recession. We’re included to read the survey as a confirmation that labor markets are improving and expected to improve further over the coming year. But we’re not inclined to interpret the survey data as an indication that the labor market is nearing full employment.

We’ve also been hearing more lately about the potential for the Affordable Care Act (ACA) to have a significant influence on labor costs and, presumably, to provide some upward price pressure. Indeed, several of our panelists commented on their concern about the influence of the ACA when they completed their May BIE survey. So can we tie any of this expected compensation growth to the ACA, a significant share of which is scheduled to go into effect eight months from now?

Because a disproportionate impact from the ACA will fall on firms that employ 50 or more workers, we separated our panel into firms with 50 or more employees, and those employing fewer than 50 workers. What we see is that average expected compensation growth is the same for the bigger employers and smaller employers. Moreover, the big firms in our sample report the same inflation expectation as the smaller firms.

But the data reveal that the bigger firms are a little more uncertain about their unit cost projections for the year ahead. OK, it’s not a big difference, but it is statistically significant. So while their cost and compensation expectations are not yet being affected by the prospect of the ACA, the act might be influencing their uncertainty about those potential costs.



Photo of Mike BryanBy Mike Bryan, vice president and senior economist,

Photo of Brent MeyerBrent Meyer, economist, and

Photo of Nicholas ParkerNicholas Parker, senior economic research analyst, all in the Atlanta Fed’s research department


May 16, 2013 in Business Inflation Expectations, Economics, Health Care, Inflation Expectations, Labor Markets, Pricing | Permalink

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Maybe we're finally reaching the point where firms can no longer expropriate productivity gains. If you look at the total hourly compensation for non-supervisory workers vs. productivity, the last 40 years have more or less seen the gains made during the Great Compression utterly obliterated. Now that we're back to Gilded-Age levels of income distribution, it may be that we've reached an equilibrium.

Posted by: Valerie Keefe | May 19, 2013 at 12:22 PM

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February 12, 2007

Another Thought On The Edwards Health Care Plan

I find myself agreeing with Dean Baker's opinion that this is the most interesting part of presidential candidate John Edwards' health care plan:

The U.S. government will help states and groups of states create regional Health Markets, non-profit purchasing pools that offer a choice of competing insurance plans. At least one plan would be a public program based upon Medicare. All plans will include comprehensive benefits, including full mental health benefits. Families and businesses could choose to supplement their coverage with additional benefits. The markets will be available to everyone who does not get comparable insurance from their jobs or a public program and to employers that choose to join rather than offer their own insurance plans.

The one thing that worries me is the possibility that the endgame is domination by the public Medicare-like program, not because it is the best or most efficient means of providing insurance, but because state-run enterprises can stifle the competition by exploiting their access to taxpayer capital.

Fortunately, there is something of a model for markets in which government and private firms compete. That model comes in the form of the Monetary Control Act of 1980, which governs the behavior of the Federal Reserve when it participates in businesses for which there are actual or potential private-sector alternatives. (An example of such a business would be the collection and clearing of checks.)  In essence, the rules of the Act require that the Federal Reserve cover its economic costs, which include the return to capital that would be required by the owners of for-profit businesses.

Why is is it necessary to have the government producing services that private firms are able and willing to provide?  Whether you are talking about medical insurance or check-processing, it's a good question.  But arguably the provisions of the Monetary Control Act resulted in an efficiency-focused government supplier with some devotion to serving markets (community banks in particular) that might have been less desirable to private providers of those services.  And that doesn't sound like a bad outcome for a health care system.

February 12, 2007 in Health Care | Permalink

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Maybe the times are a changing? First, I find myself in total agreement with you on Gov't's seeming inability to "do" very little right. Then, I realized it's been at least two weeks since I last received a 0% interest credit card offer & this I hope is a sign of a tremendous turn for the best. And, lastly, I found Fed Pres. Pianalto's speech last week illuminating.
We don't need the FED to raise rates, we do need them to be extremely deliberate about lowering them.

Posted by: bailey | February 13, 2007 at 09:09 AM

Health Care reform requires a better people who will handle the new system that are more effecient and more trustworthy.

Posted by: cheap Soma online | August 25, 2009 at 10:37 PM

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February 11, 2007

John Edwards Leaves The Gate On Health Care

From Dean Baker I learned...

John Edwards jumped ahead of the other designated major candidates in proposing a detailed plan to get to universal coverage.

Hooray for Senator Edwards, who deserves nothing but credit for jump-starting the debate.  His proposal envisions a future with mandatory universal insurance coverage, provided through a combination of public and private sources, and "regional Health markets" designed to resolve the problem of constructing adequate risk pools.

The risk-pool problem has presumably helped (along with tax subsidies, of course) to entangle the provision of insurance with employment, but Senator Edwards is apparently uninterested in moving away from employer-based health care plans:

Businesses have a responsibility to support their employees’ health. They will be required to either provide a comprehensive health plan to their employees or to contribute to the cost of covering them through Health Markets.

This doesn't seem like such a good idea to me.  As Gary Becker wrote not too long ago:

The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government. Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time. This artificial incentive to combine health insurance with employment would be eliminated under [President Bush's] proposal.

Or, as Mark Thoma notes (citing an argument by Ezekiel Emanuel and Victor Fuchs that was also picked up by Arnold Kling):

...there does seem to be movement toward universal care, and all sides generally agree that employers should get out of the health insurance business.

An argument for employer-based system might start with arguing that it is the only way to combat the isolate and kill strategy of insurance companies described by Brad DeLong

Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people's work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets. The way to solve it is to shove people into pools as big as possible.

Tyler Cowen has a response to this, but in any event it would seem that the Edwards regional Health markets gets to that issue independently -- why the insistence that businesses "provide a comprehensive health plan to their employees"?

The best -- or at least the cleverest --argument I've seen for employer-provided insurance comes from Steve Landsburg in his book The Armchair Economist:

Employers typically have less than perfect information about what their employees are up to. This makes it hard to get incentives right. You can't reward productivity that you can't observe...

Many employers provide their employees with more health care coverage than is required by law, essentially giving an extra $500 worth of medical insurance instead of an extra $500 in wages. At first this seems mysterious: Why not give employee the cash and let them spend it as they want?  A partial answer -- and perhaps the entire answer -- is that employees prefer nontaxable benefits to taxable wages.  But another possible answer is that good health care enhances productivity.  If productivity were easily observed and rewarded, there would be no issue here, because employees would have ample incentives on their own to acquire adequate health care.  But in a word of imperfect information, employee benefit packages can be the best way to enforce good behavior.

Interesting argument, but it is, of course, a reason employers would continue to provide health care benefits of their volition -- no mandate, or tax subsidy, required.   

So, I'm not quite sold on the whole Edwards package, but do say kudos again for laying the ideas out in plain view. Now, I think, the onus is on everyone else to explain what they have in mind, and why it is better than what is now on the table.

UPDATE: Arnold Kling lays out his own vision, at TCS Daily.  (Here I offer a wildly unnecessary, but nonetheless obligatory, hat tip to Instapundit.)  As far as I know, Arnold is not running for anything, but some smart candidate might think about adding him to the team.

February 11, 2007 in Health Care | Permalink

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Tracked on Feb 14, 2007 11:55:01 PM

Comments

I see the Edwards' "pay or play' strategy as a path away from employer-based insurance. It's pretty hard to envision that Congress will just mandate a complete overhaul of the current employer-based system overnight. However, if you mandate a pay or play option, and the pay option becomes progressively more attractive through time (or employers buy into the publicly run system, which gets you pretty much the same place), then we can work our way out of employer-based insurance.

I see 3 basic options in this story;
1)a government-run universal system, similar to medicare;
2) an employer-based system; and
3) an individual based system.

Because I believe so strongly in markets, #3 would be a complete disaster. Private insurers will be far more effective in denying coverage to people who need care, than the government bureaucrats who try to regulate them and prevent this cherry-picking from taking place.

Posted by: Dean Baker | February 12, 2007 at 08:13 AM

Dean -- I do appreciate the sentiment that it is hard for regulators to stay in front of the designs of profit-maximizing market participants. But that to me also cuts in the direction of feeling a bit queasy at the thought of relying on a government-run system similar to medicare. I can't quite get a glimpse of a workable outcome that doesn't involve some sort of governmental hand in solving the pooling issue. But I also think that on the other side of the negotiating table should be someone who can walk away in the event that what the public's government agent wants to implement is the unworkable or foolish -- which in turn suggests to me that the provision of the insurance itself is best done by competing private firms.

Your point that political feasibility may require a plan that gradually evolves away from an employer-based mechanism is well taken. Maybe we primarily disagree on what it should evolve toward.

Posted by: Dave Altig | February 12, 2007 at 09:25 PM

John Edwards wants to increase taxes to fund universal healthcare in the taxpayer's view. However, in the long run, Universal Health Care will save money for the American people.
The increase in taxes will be small to the individual in comparison to the cost for a health plan that they face today. Discuss this whether you support or not this proposal at
Isupportthismessage.com

Posted by: Amy | March 19, 2007 at 12:05 PM

Easystm.com will give Coverage of short term health insurance as early as the next day... just a few simple medical questions to answer. Best of all, you can choose to receive your policy electronically!

www.easystm.com

Posted by: kurt jarcik | March 30, 2007 at 01:11 PM

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February 01, 2007

One Health Care Problem I'm Not So Worried About

A week ago Brad DeLong posted a very interesting -- and despairing -- contemplation on the rising cost of health care, offering up this possibility:

... now Marit Rehavi comes by with an additional reason to despair. For according to her reading, as America ages and as American society changes an increasing share of the increase in health care costs is going to be driven not by increases in adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care, but by expensive chronic diseases and risk factors driven by long-term lifestyle choices.

I've been mulling that one over, and my first reaction is that this additional reason to despair sounds a lot like moral hazard to me.  This definition, from The Economist, is pretty serviceable:

Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

So if the problem -- or a big part of it -- is "expensive chronic diseases and risk factors driven by long-term lifestyle choices," then there would seem to be a logical solution: Make people pay for making those bad lifestyle choices.  In other words, higher premiums for smokers and for people who are overweight, lower premiums for those who enroll in certified exercise plans, that sort of thing.  This is after all, just the market answer to Brad's "nanny state" solution.  It wouldn't be perfect, but surely it would go a long way to ameliorating some of the most obvious risks. 

That would still leave "adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care" to fret about, but why pile on other problems if we don't have to?

Other (sort of) recent (sort of) related thoughts: From Andrew Samwick (here and here), from Mark Thoma, from winterspeak.

February 1, 2007 in Health Care | Permalink

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Addressing "moral hazard" in the health insurance context using a free market approach may be beneficial. But please keep in mind that it is not a "near root cause."

Posted by: Richard A. Osborn | February 02, 2007 at 05:05 AM

The causes of death have to sum to 100%. So if by changing lifestyles, not smoking for example, we cause one type of death to decline in importance something else must increase in importance to maintain the 100% rule. But since we have no idea what cause of death would increase we have no idea what would happen to health care cost -- they could just as well increase as fall.

Posted by: spencer | February 02, 2007 at 09:43 AM

Chronic will get bigger just from the fact of the size of the cohort. I can's see moral hazard here. Will I adopt a wild and wooly life style just because I expect to live longer or because I won the genetic lottery? Life style is not very controllable unless you ration care via life style, ie deny smokers/overwight people care for heart disease, organ failure, cancer and similar. Not likely.
Even if you did this, make em pay or rationing, I think it would have very little impact on choice of life style. Young people think they will live forever or think they will never get old.

Posted by: DILBERT DOGBERT | February 03, 2007 at 11:58 PM

Interesting that you bring "moral hazard" into this arena, Dave, when the Fed continues to turn a blind eye to the moral hazard it has been contributing to in the liquidity-induced "asset inflation" arena worldwide.

As a sidelight, but related, I'd be interested to your 'take' on Charles Kindleberger' and Robert Aliber's "Manias, Panics, and Crashes: A history of financial crises", AND Peter Bernstein's "Against the Gods: The remarkable Story of Risk".

Posted by: Dave Iverson | February 04, 2007 at 02:19 PM

spencer - "So if by changing lifestyles, not smoking for example, we cause one type of death to decline in importance something else must increase in importance to maintain the 100% rule. But since we have no idea what cause of death would increase we have no idea what would happen to health care cost -- they could just as well increase as fall."

Now, wait a minute. If everyone quit smoking, all hell would break loose and some would be killed. Yeah, think about that.

Posted by: Movie Guy | February 09, 2007 at 09:42 AM

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August 30, 2006

Progress?

There is a little something for everyone -- that is to say, things to cheer about, things to frown about -- in the Census Bureau's report on Income, Poverty, and Health Insurance Coverage for 2005.  MarketWatch summarizes:

Real U.S. median household income rose 1.1% in 2005, climbing for the first increase since 1999, but inflation-adjusted incomes still have not recovered fully from the 2001 recession, the Census Bureau reported Tuesday.

Real median incomes for 2005 rose 1.1% to $46,326 but were down 0.5% from 2001's $46,569. Median income means half of the 114.4 million U.S. households earned less, half earned more. The figures have been adjusted for inflation.

Income inequality continued to increase, with the top 20% of families accounting for a record 50.4% of all household income, just the third time since the mid-1960s that they've taken more than half. For the top 20%, the median income rose by $3,592, or 2.2%, to $166,000.

Meanwhile, the bottom 20% captured just 3.4% of income, matching their lowest share since the mid-1960s. Median incomes for the bottom 20% increased by $17, or 0.2%, to $11,288...

The poverty rate declined for the first time since 2000, nosing down to 12.6% from 12.7%, but this amounted to a statistically insignificant change, the government said. The poverty rate was 1.3 percentage points higher than 2001's 11.3% but was lower than the 13.8% average in the 1990s.

A couple of things I found interesting in details.  A few facts: About 27 percent of people 25 years of age or older had incomes less than twice the poverty level.  For prime working-age folks -- those between 25 and 65 -- with at least 4 years of college, your chance of having income that low was, in 2005, between 8 and 12 percent (depending on your exact age group).  Among those with high-school degrees only, the chance of being in the low income group ranged from 25 to 39 percent.  And without a high-school degree?  Your chance of having an income less than twice the poverty rate was in excess of 50 percent.
 
When thinking about income inequality -- especially among those away from the extremely high and extremely low levels of income -- there is just no escaping this picture:

   

Education_premium_real_dollars   
 
   
The second thing I found interesting was the reasons that people who were not employed gave for not working:
   
Poverty_2a   
Poverty_2b
   
Conclusion?  If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously related to the state of the labor market.
UPDATE: The comment by kharris below made me realize that that last sentence is pretty silly. It is clear that choosing retirement rather than work, work at home rather than work in the market, and choosing educational investment over employment are inherently related to conditions in the labor market.  I was thinking in terms of conditions related to unemployment, and so the phrase probably should have read:
If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously associated with a lack of jobs for those who choose to remain in the labor force.
Stated that way, it is clear that judging this to be a good or bad thing is pretty tricky.  Those who are retired or have decided to stay home to attend to family may simply be discouraged by the lack of opportunity.  And we might lament that the return to working is so low that poverty is associated with separation from the labor force.  On the other hand, we might be encouraged that such a large fraction of those under the poverty line appear to be making a deliberate choice to acauire human capital.  This is one of those cases where each of theose reactions is probably justified.
BLOGLAND UPDATE: Mark Thoma has an extensive round-up, the dominant theme being that this is a bad report.  Daniel Gross is not so impressed either.  John Irons declares the increase in the number of Americans without health insurance "bleak." 

August 30, 2006 in Health Care, Inequality, Labor Markets, This, That, and the Other | Permalink

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Tracked on Aug 30, 2006 1:57:02 PM

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See Thoma, http://economistsview.typepad.com/economistsview/2006/08/disappointing_n.html#more
for all the bad news. Entry college graduate salaries continue to fall. Rising incomes are only among immigrants and the elderly

Posted by: Lord | August 30, 2006 at 02:33 AM

"If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously related to the state of the labor market."

Huh? We have no way of knowing how the people below the poverty line are distributed across categories in the reasons-for-not-working pie charts. One could just as easily assert, based on the pie charts, that reasons for poverty are not obviously unrelated to the state of the labor market.

Posted by: kharris | August 30, 2006 at 03:46 PM

kharris -- The pie chart applies only to people below the pverty line, so I'm not entirely sure what you mean. However, see my comment above, because there is a sense in which my statement was poorly crafted.

Posted by: Dave Altig | August 30, 2006 at 09:26 PM

Globalization will continue to keep a lid on wage inflation here in the US... JMHO.

Posted by: muckdog | September 02, 2006 at 02:21 AM

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February 11, 2006

A Case Against Medical Savings Accounts

Courtesy of Gerald Prante at Tax Policy Blog,  we are informed that former Congressional Budget Office director Douglas Holtz-Eakin is not a fan of the President's proposal for tax-preferred medical savings accounts:

In response to the idea of adding a tax exclusion for individually purchased health care expenses -- in addition to the current one for employer-provided care -- Holtz-Eakin had this to say:

I think it's bad tax policy. We ought to have in this country a tax system that means something. I am less in favor of tax systems that are designed to do things other than raise revenue. We are likely to spend a lot of money in the future. The government is likely to be bigger than it is now -- I don't know how much -- and we need a tax system that raises those revenues efficiently and doesn't muck up our economy too much. Things like this are a recipe for mucky up the tax system and the economy and so I really am nervous about that as -- from a tax-policy perspective, and implementation perspective.

In general, I am the picture of sympathy for this sentiment.  The best tax code is one that has low marginal tax rates and a broad base.  That latter requirement means that there should be minimal use of the tax code as a tool for social engineering (or, worse, political gain).

But I make an exception for health care.  The fact is that we are not talking about simply adding a distortion that was previously nonexistent.  Distortions are already present in the form of tax preference for employer-provided health insurance expenditures.   As Andrew Samwick emphasizes in his related Wall Street Journal debate with Mark Thoma, the idea of the tax-preferred accounts to finance out-of-pocket expenditures is designed to eliminate the perverse incentives created by subsidizing insurance with low deductibles, and to improve the portability of health care provisions. 

I gather that Dr. Holtz-Eakin would prefer that we address the problem by eliminating all tax preferences of this sort, and there I am somewhat sympathetic.  A preferable course might well be to address some of the regulatory issues that Andrew discusses (such as making health care coverage mandatory) and dealing with the availability of coverage to the poor through a straight system of transfers (although it would be mistaken to claim that this isn't mucking up the tax system to some degree).  But absent the social consensus to move in that direction, something like medical saving accounts seems like a reasonable second-best strategy.

February 11, 2006 in Health Care, Taxes | Permalink

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Logically one could combine accounts with removal of tax exemptions for employer paid healthcare moving to a system of individual coverage that could be had regardless of employer. That would be an improvement over the current system, but would people be happy with individual versus group policies? The healthy likely would and the unhealthy likely would not.

Posted by: Lord | February 12, 2006 at 02:54 PM

The system can only really make sense, I think, with some regulatory change that prohibits nonexclusion (on the part of both buyers and sellers).

Posted by: Dave Altig | February 13, 2006 at 06:27 AM

Discriminatory pricing is the main reason they won't work. Account users end up paying retail, while insurers routinely pay only 20%.

One would need to identify the pricing criteria and limit discrimination to those criteria.

Posted by: Lord | February 13, 2006 at 02:21 PM

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February 08, 2006

This Week In Entitlement Reform

In this the federal budget week, blogland brings a couple of interesting discussions on social security and health policy reform.  First up (in reverse chronological order) is the latest Econoblog installment featuring Mark Thoma and Andrew Samwick.  This, from Andrew, neatly summarizes my thinking about the foundation on which social insurance reform must be built:

As global trade increases, the U.S. loses its ability to be the least-cost producer if it stipulates that employment contracts must include taxes for all manner of redistributive programs. If we are to purse both social insurance and economic growth, we need to consider alternatives to the employment relationship as a way to deal with our health and retirement needs.

Mark agrees, but is skeptical about solutions that rely primarily on the private sector:

There are substantial problems -- market failures -- in the private-sector provision of health and retirement insurance that are not easily overcome with market-based regulatory schemes.

For example, adverse selection issues, where high medical-cost individuals are excluded from coverage or are forced to pay extremely high premiums, plague health-insurance markets. High administrative costs of private health insurance are another problem, and there are problems in the private provision of retirement insurance as well. When markets fail, the insured often pay for the uninsured, and for these and other reasons I believe it's best to share the burden more generally through government programs that require individuals to contribute insurance premiums.

I confess that I don't quite buy that one.  As Andrew points out, there is a distinction between government regulation of an industry and government production of the service that the industry supplies:

The first mistake is to make insurance voluntary when we don't subsequently exclude those who need care from getting it at the public's expense. We should make health insurance mandatory, but we should do so by putting the mandate on the individual, not the employer...

The second mistake is to allow the tax code to distort the type of insurance offered. Premiums are fully excludable from taxation, but out-of-pocket expenses are only imperfectly tax deductible. This generates extremely generous, first-dollar coverage and little incentive for individuals to economize on the care they receive. Rather than the Bush administration's proposal to make out-of-pocket expenses deductible via expanded medical savings accounts, I favor removing the excludability of health-insurance premiums from taxable income.

The third mistake is to force young workers to subsidize older workers in group health-insurance markets. Insurance is supposed to transfer resources from those who have unpredictably low expenses to those who have unpredictably high expenses.

I agree with Mark that the government should mandate coverage, but that doesn't mean the government should centralize the provision of services or dictate their terms. I would prefer to fix some of the obvious mistakes before making such radical changes to the system.

Andrew's diagnosis gets a second from Dr. Becker in this week's installment of the Becker-Posner Blog:

...many of the problems in the health system are correctable with the right policies. I believe the three most important defects are the over 40 million Americans who are not insured, the weak incentives to economize on unnecessary medical spending by most people covered by some form of health insurance, and the tying together of health insurance with employment as a result of special tax privileges provided to employers.

Arguably the best parts of President Bush's State of the Union address are his suggested reforms in the health care system. They do not fully attack all the problems, but they do offer significant improvements. I will concentrate particularly on his proposals to extend Health Savings Accounts (HSAs), and to improve the portability of health insurance when workers change jobs.

Professor Becker goes on to an extensive discussion of the HSA proposal, the benefits of such a plan, and a very wise observation about at least one of the costs:

President Bush has proposed changes in the health care system that initially will reduce tax collections and increase federal spending at a time when the US government is already spending too much and running a sizeable budget deficit. However, by making the health delivery system more efficient, this important set of proposals in the State of the Union address might end up raising tax collections, and certainly would improve the efficiency of the American economy.

There are plenty of other interesting things in these two items -- the discussion, for example, of the Liebman-MacGuineas-Samwick social security reform proposal which I have endorsed (and which was met with a resistance I find as baffling as members of Congress giving themselves a standing ovation for doing absolutely nothing about fixing a system that clearly needs to be fixed).

Really, I beg you.  Read the whole things.


UPDATE: William Polley agrees the key question is "How much social insurance should be provided by the government and how much should be provided by markets." 

There is much relevant discussion at Angry Bear: here, here, and here.  It's fair to say we've taken different sides on this one.

Kevin at Truck and Barter points to research by Alice Zawacki and Amy Taylor on the relationship between employer characteristics and the provision of health insurance benefits. 

You'll find some thoughts about the Posner half of the Becker-Posner conversation at winterspeak

Max remains a consistent reform-skeptic (at least as it relates to social security).

February 8, 2006 in Health Care, Social Security | Permalink

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Not exempting healthcare costs from income is not unreasonable, but decoupling healthcare from employment, as is increasingly being done, would expose all of us to the prevalent market failures. If government determines how much should be spent on it, they had better be prepared to pay for it for all those that can't, and this is the largest portion of the population.

Health Savings Accounts, though, really focus on the wrong end of the problem. If we broke the costs down by occurence and treatment we would see the majority of the costs are those that would fall under catastrophic coverage. They would do little to increase efficency.

Posted by: Lord | February 08, 2006 at 01:05 PM

Lord, Irespectfully disagree. I have a family of four, and a good income. I have elected to get the cheapest insurance I could and pay for medical out of pocket(I am self employed) The HSA account is great for me, because I get to put money away tax free, and if I don't get sick I don't use it. the only thing that worries me is a catastrophic event or illness. I have insurance to cover that.

I agree that the health system of this country is in need for reform. I think that we need to thinking terms of market based reforms and competition, and not of insurance and deductables. there needs to be tort reform as well.

If we went to a simple fee for service system, I think costs would go down, and we would get better service. Vouchers could be given to peopel that couldn't afford it.

Posted by: jeff | February 08, 2006 at 10:02 PM

I agree with the principle people should pay for the benefits they receive, but realistically fewer than half the people out there are able to do so. Nor do I have any illusions that reducing costshifting will materially alter who pays nor how much they pay. Government is probably the largest costshifter of all and it is unlikely changes along these lines will decrease costs. Government will continue to pay for something like half of all healthcare. Therefore I think it misleading to think of this as a private versus public problem, it is a question of the best way to pay for and provide a public benefit.

We all like tax breaks. It can be structured as accounts plus catastrophic coverage for those with adequate incomes, but what do we do with the other half of the healthcare system, those that don't? Does the government fund their accounts? Does the government cover the catastrophic coverage after your insurer has dropped you, or more likely after you have had to drop it when you could no longer pay the costs? What proportion of the premium did you save over a full coverage plan?

While coverage may be separated from employers, it cannot be separated from employment as that is the only means the vast majority of people have of paying for it.

Posted by: Lord | February 09, 2006 at 12:23 AM

Lord -- I'm not sure I understand what makes health insurance special here. In the state I live in, automobile insurance is mandatory, and you darn well better have it. Yet nonone suggests that the insurance ought be provided by the government. You might say the example is forced because people can opt out by not driving -- something that would not be available if health insurance is mad amndatory (or at least the opt-out route would totally unacceptable). But that is where government transfers and such come in. My point is simply that there really is a choice between government provided services and government subsidized services and, in most cases I can think of, if one is feasible the other will be as well. And I strongly prefer the latter.

Posted by: Dave Altig | February 10, 2006 at 02:14 PM

Government doesn't pay for auto insurance; we all do when people without it have accidents. Let them eat cake is a nice sentiment but hardly deals with the problem.

The difference is government is half or more than half the market. If you don't talk about about how that challenge is met, then you aren't talking about healthcare.

Here is an alternative. Tax healthcare 100% and redistribute the revenues to cover the other half. This would be consistent with proposals suggested and have many socially desirable effects.

Posted by: Lord | February 11, 2006 at 11:58 AM

The idea that health insurance isn't enough like auto insurance now, and that HSAs move us further in that direction, is baloney.

You don't pay an "annual deductible" on car insurance - you pay a "per-event deductible". And the stuff that auto insurance covers isn't things that changing your oil would have any effect on, so the oft-claimed perversity of health insurance "covering the equivalent of oil changes" is also baloney.

http://mdahmus.monkeysystems.com/blog/archives/000262.html

Posted by: M1EK | February 12, 2006 at 10:29 AM

In comparison to pharma drugs herbal medicines have less adverse effects...

so visit and buy herbal medicines only

Posted by: khosla | February 12, 2006 at 11:38 PM

Lord and M1EK -- I think I made my point poorly. I was only trying to say that the heavy involvement of government in health care is a measure of the social value placed on access to the service, not an intrinsic quality of the moral hazard and adverse selection problems associated with the insurance being provided. The oil change analogy is a clever one, but there are all sorts of other preventative measures that are involved in the types of events that automobile insurance does cover ... not talking on cell phones while driving, not eating when operating a motor vehicle, and so on. Or take homeowners insurance. Fire prevention can be greatly facilitated by the addition of smoke alarms, an appropriate number of well-maintained fire extingushers, regular servicing of furnaces and fire places. Some of these things can be factored into prices, of course, but so it is also with health insurance (in the form of rate reductions for nonsmokers, participants in "wellness" programs, and so on). Or let's get started on life insurance...

Posted by: Dave Altig | February 13, 2006 at 06:37 AM

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January 22, 2006

We Are Richer, Therefore We Spend (On Health Care)

Angry Bear apparently never sleeps, and to prove it Kash Mansori has an interesting post on medical care spending (posted at 4:15 AM Saturday morning!).  A few highlights:

It should come as no surprise to anyone that, partly as a result of a persistently higher-than-average rate of inflation in medical care, consumers have been spending a larger and larger fraction of their income on medical care...

... [Bureau of Economic Analysis] data attributes much of this increase in health care's budget share to an increase in real medical care spending, not to inflation. In other words, the rapid advances in health care spending during the 2000s are largely due to the fact that individuals are consuming more health care, according to the BEA...

A few weeks ago I suggested that higher spending may be associated with declines in the effective cost of medical care, by which I mean costs inclusive of factors such as pain, probability of complications, and recovery time.  Implicitly I was suggesting that we overestimate the price of medical services, a possibility Kash notes in his post.

Economists Charles Jones and Robert Hall have another explanation: Rising shares of expenditure on medical care is the natural outcome of becoming ever wealthier.  From their abstract:

  Health care extends life. Over the past half century, Americans spent   a rising share of total economic resources on health and enjoyed   substantially longer lives as a result. Debate on health policy often   focuses on limiting the growth of health spending. We investigate an   issue central to this debate: Is the growth of health spending the   rational response to changing economic conditions---notably the growth   of income per person? We develop a model based on standard economic   assumptions and argue that this is indeed the case. Standard   preferences---of the kind used widely in economics to study   consumption, asset pricing, and labor supply---imply that health   spending is a superior good with an income elasticity well above one.... In   projections based on the quantitative analysis of our model, the   optimal health share of spending seems likely to exceed 30 percent by   the middle of the century.

Kash has it just right when he says

... what is underlying dramatic change in medical care spending of the past few years. .. [is clearly] an important question, because it plays a crucial role in understanding whether the rapid rise in people's spending on health care in recent years is a good thing or bad.

As of now, I'm in the good thing camp.

January 22, 2006 in Health Care | Permalink

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That begs the question of why isn't there more out there that we value enough to invest in and spend on.

Posted by: Lord | January 23, 2006 at 01:16 PM

If health care has an income elasticity greater than one, all this talk about spending too much on health care strikes me as misdirected. Of course, the fact that income distribution is getting more skewed over time raises some interesting distributional issues. But even Milton Friedman would argue that the U.S. health care market is inefficient. Inefficiency can exist even when the share of income accruing to the product is low - whereas an efficient market could command a large portion of one expenditure if that product is in high demand, which is your point.

Posted by: pgl | January 23, 2006 at 05:42 PM

Lord -- Agreed, but that wasn't really the question I was thinking about.

pgl -- Agreed as well. In my couple of posts on this topic I haven't meant to imply the absence of things to fix regarding how health care is delivered in this country. But I do think this notion of rising expneditures related to both price and income elasticity captures a very significant element of truth. Would we both agree that the big goal is allocative efficiency, not expenditure reduction?

Posted by: Dave Altig | January 24, 2006 at 09:33 AM

David - agreed. Also check out the latest from Arnold Kling, which was so brilliant (or was that humorous) that I had to post on it. Short version - health care has to be a Giffin good to accept the White House logic for its own proposal.

Posted by: pgl | January 25, 2006 at 07:44 PM

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August 30, 2005

More On The Labor Compensation Issue

In yesterday's Wall Street Journal (page A9 in the print edition), Stephen Moore made an observation similar to the one emphasized in my previous post: While wage and growth has been pretty anemic  over the past several years, it is difficult to make the same case with respect to total labor compensation, which adds benefit payments to wages.

In his brand spanking new blog, Daniel Gross takes exception to one of Moore's comments (duly noted by Brad DeLong):

Stephen Moore, a member of the Journal's editorial board, writes in today's paper:

The explosion of benefits paid to workers is in large part an artifact of the federal tax code, which allows employers to deduct from taxes pensions, health care, child care, and the like, but not wages.

Read it twice. Stephen Moore apparently thinks companies can't deduct wages paid to their workers from their taxable income the way they can deduct pension, health care, and child care costs. And apparently nobody at the Journal's op-ed page knew enough, or thought enough, to correct him.

Maybe Dan is mainly upset, one newspaper guy to another, about sloppiness of any kind.  But the economics of the central claim -- that the tax code favors payment in non-wage form -- does not seem wrong to me.  While it is true that employers can deduct wage expense just as they can other employee costs, it is not true that wage payments and benefits are the same when they get into the hands of employees.  Wage payments are taxed, benefits are not.  When the tax system is taken as a whole, a pre-tax dollar delivered to employees in the form of benefits yields a higher net payout to workers than a dollar delivered in the form of explicit wages.  To me, that sounds like the type of tax distortion Moore was trying to describe.

On a (sort of) related point, in the comment section of the previous post Angry Bear's pgl takes me to task (probably with some justification) for not addressing an argument that he has made before:

In my 1st RBC post, I noted Kash's argument that the rise in real compensation is substantially due to more costly health insurance. Not better, just more costly. Why did I mention it? It's a supply side. And yet you don't note that this is the reason for the divergence between real wage growth v. real compensation. Huh?

The reason that I did not take note of it is that I'm not convinced the observation is relevant.  Health insurance is the largest single component of employee benefit expenditures.  For a given total amount of compensation, increasing payments in the form of more insurance expenditure means less in other forms -- including wages.  Whether we get more or less for those higher insurance expenditures is an interesting and important question, as is the question of whether the tax code is introducing welfare-degrading means of compensating workers.  But I don't think it has much to do with the question I was trying to address, which was whether or not the return to working has been growing at an abnormally low rate.

UPDATE: Angry Bear (the orginal!) notes that the offending passage has been corrected:

THE AUG. 27 feature, "The Wages of Prosperity," by Stephen Moore mistakenly reported that wages are not tax deductible to employers. The relevant sentence should have said, "Fringe benefits have exploded in recent years because benefits are tax free to employees, but wages are taxed."

AB is still not happy.

The corrected wording doesn't pass muster as an explanation for flat wage growth, either. Benefits have been tax free to employees, and wages have not, for as long as I can remember. So the ongoing taxability (to the employee) of wages but not benefits simply cannot explain why wage growth has been flat in the last 4 years.

The best I can do here is to simply repeat that I think it can.

 

August 30, 2005 in Health Care, Labor Markets | Permalink

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I think pgl really makes a point that is also in your chart in the earlier post. Real compensation (he would argue), when properly deflated, has not been rising significantly, whereas overall domestic product (per worker) clearly has been rising, no matter how you deflate it. Something – presumably something about the labor market – is causing workers to get the short end of the stick when it comes to dividing the proceeds from recent economic growth. This same point is made by noting that the compensation line in your chart has been consistently (and increasingly) below the productivity line in recent years.

I believe, however, that we are barking up the wrong tree by talking about (ex post) real compensation. To my mind, the whole basis for talking about labor market slack originates from the finding of very strong empirical links between “slack variables” (most typically the unemployment rate) and changes in the inflation rate. I’ll leave you and pgl to argue about the implications of the division of output between labor and capital, and whether policymakers can or should do anything about that, but I think we can all agree that more employment is generally a good thing if it doesn’t put upward pressure on the overall inflation rate. Therefore, the sense in which I would mean the word “slack” is that there is room for more employment without exacerbating inflation.

Thus, when I cite low help wanted advertising as evidence of slack, it is specifically with the knowledge that, historically, there is a strong correlation between help wanted advertising and changes in the inflation rate. (Indeed, the fact that help wanted advertising reached its all-time high in the late 1970s might suggest that oil prices are less important than one might think, both as a source of inflation and as a depressant to labor demand.) Of course, the correlation isn’t perfect, and it exhibits the same sort of instabilities as the inflation-unemployment correlation. However, when we take into account a variety of slack variables (e.g. average duration of unemployment, growth rate of payroll employment, etc.), all of which have strong empirical correlations with inflation changes, the picture that emerges (at least to me) is one of substantial slack.

Posted by: knzn | August 31, 2005 at 10:51 AM

I think at this point, we just agree to disagree. I interpret the instability in the inflation/slack relationships -- which I guess I think are more substantial than you do -- as a sign that the slack concept is on shaky ground. I understand that I am in the minority on this. I do indeed believe that employment could grow much faster without generating inflationary pressures. But I also beleive that this will happen when the real environment changes to make it so.

Posted by: Dave Altig | August 31, 2005 at 05:17 PM

I’m willing to acknowledge that the glass of Keynesian economics is only half full, but you and Bob Hall seem to be saying that, because it’s half empty, we need to go back to the refrigerator. Maybe it is a disagreement about the severity of the instability, as you suggest. But I could imagine a “composite slack indicator” that would have a much more stable relationship to inflation than its individual components.

I’m not sure what you mean when you say that “employment could grow much faster without generating inflationary pressures.” Almost anyone would have to agree there are some circumstances (e.g., a change in labor/leisure preferences) where that could happen. Are you making a substantive statement? What changes in the real environment do you think are necessary, and why?

Posted by: knzn | August 31, 2005 at 06:23 PM

knzn -- Productivity growth -- in the fundeamental, exogenous sense -- is the obvious example. I cannot answer definitively what the circumstances would be that would lead to a pickup in employment growth. That would suggest I know how to explain the pattern of labor market dynamics over the past five years, which I don't. I don't think anyone else does either. There is a pattern that represents a slowdown relative to the fire-breathing pace of the latter 1990s, for sure. I am not providing an answer, but rather objecting to the assumption that deficient demand, in the traditional Keynesian sense, is the explanation.

By the way, when it comes to an explanation of unemployment, I'm not saying the Keynesian glass is half empty. I'm saying that, for all practical purposes, it is completely empty. This should be read the way Hall offers it: Standard neoclassical synthesis models are just not suited to thinking about unemployment. That is not to say, however, that it is never the case that monetary policy mistakes create unemployment, or that policy is impotent to affect the unemployment rate more generally. I think there is a lot of confusion in all of this that comes from not separating the methodological case made by Hall with the interpretation of what types of shocks are actually driving outcomes today. I hope I have not contributed to that confusion.

Posted by: Dave Altig | September 01, 2005 at 01:17 PM

Health insurance is a great benefit and I think all employers should provide it.

Posted by: California Health Insurance | November 04, 2005 at 06:20 PM

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February 27, 2005

The NYT's Solution To Saving Medicare: A Highly Personal Reflection

Today's New York Times includes an article with the rather provocative title "How to Save Medicare: Die Sooner."   Flippancy of the headline aside, the article has a serious point.

...how can Medicare's ballooning costs be contained? One idea is to let people die earlier.

For the last few decades, the share of Medicare costs incurred by patients in their last year of life has stayed at about 28 percent, said Dr. Gail R. Wilensky, a senior fellow at Project HOPE who previously ran Medicare and Medicaid. Thus end-of-life care hasn't contributed unduly of late to Medicare's problems. But that doesn't mean it shouldn't be part of the solution. "If you take the assumption that you want to go where the money is, it's a reasonable place to look," Dr. Wilensky said.

End-of-life care may also be a useful focus because, in some cases, efforts to prolong life may end up only prolonging suffering. In such cases, reducing pain may be a better use of resources than heroic attempts to save lives.

This probably seems reasonable to all of us but, as the article notes, it is often easier said than done.

The question becomes, how can you identify end-of-life care, especially the kind that's likely to be of little value? "It's very difficult to predict exactly when a given individual is going to die, in most cases," said David O. Meltzer, an associate professor of medicine at the University of Chicago who also teaches economics...

... he recommended that doctors try to prepare patients and families for less resource-intensive care at the end of life. "There is no question, as a clinician, and as a patient and the family members of patients, there are things you can do to make sure that expenditures with little chance of being helpful won't be undertaken," he said. "You explain to people that the goal of medical care is not always to make people live longer."

... he recommended that doctors try to prepare patients and families for less resource-intensive care at the end of life. "There is no question, as a clinician, and as a patient and the family members of patients, there are things you can do to make sure that expenditures with little chance of being helpful won't be undertaken," he said. "You explain to people that the goal of medical care is not always to make people live longer."

I'm going to beg your indulgence, and take the highly unusual step (for this blog) of stepping out of my role of economist for a moment.  Two days after this past Thanksgiving , and less than a month after his 68th birthday, my father lost his battle with lung cancer.  Although his struggle was relatively brief in the larger scheme of things -- he had been diagnosed in the fall of 2003 with advanced-stage disease -- he followed the all-too-typical pattern of the many, many others similarly afflicted: Hopeful optimism as the first round of chemotherapy provided a brief respite, concern as the cancer came raging back, weariness as the much rougher second round of treatment took its toll, and despair as it became clear that the miracle we had all hoped for would not materialize. 

To an objective observer, it was obvious that the end was very near on Thanksgiving eve.  But despite the fact we had watched him virtually disintegrate in front of our eyes, the idea of my father's death was somehow still very abstract.  When you are living one day at a time, making it to the next sunrise becomes an obsession.

The cancer did not wait for us to come to grips with our emotions, and the moment came to make the terrible choice.  Seek (against my father's wishes) the extraordinary measure of medical care that might grant us one more desperate day -- or week? or month? or more? you never know, right? -- or resign ourselves to the dying of the light that had always, always burned so brightly in our lives.

We chose the latter.  A call was made to our local hospice organization.  On Thanksgiving morning we received the first of many visits from the remarkable human beings who would would help us usher my dad through his final days on earth.  He died -- I can think of it no other way -- as I hope I do.  In his own bed, in the home he loved, surrounded by children and grandchildren, in the arms of the woman that had shared his life's journey from childhood.   

The Times article ends with this observation.

AN alternative to saying no would be to encourage severely ill patients to choose hospice care, where the emphasis in treatment shifts from cure to quality of life. Patients are made to feel as comfortable as possible, and reducing pain takes precedence over radical procedures. At present, only about 1.6 percent of Medicare benefits pay for hospice care.

Despite the less-intensive brand of treatment, hospice care may not be cheaper than hospital care. "The assessment of hospice has not indicated that it's a clear money-saver," Dr. Wilensky said. "It can be, but we don't have very good examples."

Maybe so.  Compared to the alternative, I don't really know the ultimate price of the care my dad received in taking those last steps home.  But I do know its value.

You can find information about hospice care here.

February 27, 2005 in Health Care | Permalink

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From the New York Times "Economic View" column by Daniel Altman: [H]ow can Medicare's ballooning costs be contained? One idea is to let people die earlier. For the last few decades, the share of Medicare costs incurred by patients in their ... [Read More]

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Sorry to hear of your family's loss. Having been through it myself, I was totally unprepared.

Financially speaking, I think there are other areas in which savings are easier to come by. Prevention (both public health measures and preventive care by organized medicine) is often an excellent investment financially in addition to the obvious health benefits. In addition, the overuse phenomenon is really quite large and easier to identify in advance then is the end-of-life situation which is often known only in retrospect. Car wrecks, heart attacks etc are often sudden and fatal, andthe costs of their care are labelled end-of-life but nobody would seriously suggest less agressive treatment in most of these instances.

Posted by: quietstorm | February 27, 2005 at 02:50 PM

Sorry about your Dad. It has been years since my Dad died of lung cancer. He too died at home, never spending a day in the hospital. My best friends dad was diagnosed with cancer about the same time. His family opted for agressive care. He lived about six months longe than my Dad, had multiple rounds of chemo, and died in the hospital with a pain drip going. He may have lived longer, but the quality of his life was awful. (Not to mention what was spent.)

I believe there is a considerable amount of money to be saved in end of life care. Having worked in a hospital for years, I saw many patients come in for extraordinary care, even with a diagnosis of terminal cancer. Many died in the hospitl or the skilled unit.

A difficult issue to deal with.

Posted by: JWC | February 27, 2005 at 06:15 PM

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