Health coverage isn't a benefit, it's a pay cut

We've had a good discussion this year on the public option and on "death panels." But for all the hype over health care reform, we have not done a good job of talking about the health care system, especially why our system is so expensive. As a result, we're not doing a good job of fixing it. There's still time to change that, but not much.

The doomsaying is familiar: Left unchecked, health care reform will bankrupt our nation. It will grow to consume every dollar of gross domestic product. And Congress isn't contemplating anything nearly radical enough to avert the emergency.

The reason is not that people haven't heard grim warnings about the future. It's because they don't understand what's going on in the present. In 2009, the average employer-sponsored health care plan cost a bit less than $13,500. But virtually no one cut a check for $13,500. Employers usually pay more than 70 percent of their employees' health care costs. To employees, that seems like a good deal, particularly given how fast costs are growing. A "benefit," as it's called.

But health care coverage is not a benefit. It's a wage deduction. When premium costs go up, wages go down. When premium costs go down, wages go up. But workers don't know that. The information is hidden from them. That means cost control seems like all pain and no gain, which makes it virtually impossible for Congress to pass. It's like asking someone to diet when they don't realize it will help them lose weight.

Cost control, in fact, is some pain in return for a fat raise. A 2006 study by Harvard's Katherine Baicker and Amitabh Chandra used malpractice payments to estimate the effect of premium increases on wages. They found that a 10 percent increase in health care premiums "results in an offsetting decrease in wages of 2.3 percent" and an increase in unemployment of 1.2 percentage points. Compensation is basically a set sum for employers, and they don't seem to care much whether it goes into wages or into health care costs.

Workers saw this in the 1990s. This was the era of the managed-care revolution, which most remember as a horrifying failure.

Famously, audiences applauded when Helen Hunt broke out into a profanity-laden rant against HMOs in the movie "As Good as It Gets." The backlash was so intense that by 2000, the managed- care experiment was virtually over. The problem? The data showed the experiment to be a tremendous success.

From 1989-95, median wages fell a bit. Then, managed care kicked in. Annual growth in health care costs fell from more than 10 percent in the early 1990s to less than 5 percent in the late '90s. Meanwhile, wages jumped, rising more than 11 percent from 1995 to 2000. Then we ended the managed-care experiment, and health care costs resumed their normal speed of growth. Wages slumped from 2000 to 2006.

"By every observable indicator," said Harvard's David Cutler, "managed care was a huge success. It cut spending, cut the growth of spending and didn't seem to kill anyone. And yet everyone hated it."

Of course they hated it. They didn't see its benefits, only its costs. They knew they suddenly were trapped in networks and being hassled by their insurers. As for their raises, those were nice, but why are you changing the subject? Since 1990, wages have tracked changes in premiums more closely than they've tracked the growth of the GDP. Maybe if more workers knew that, they would be more interested in efforts to control health care costs.

During the Senate Finance Committee's negotiations, Ron Wyden, D-Ore., offered to give employees the option to reject their employer's offerings in return for a voucher that would help them choose their insurance on exchanges, which meant they would save money if they chose cheaper plans. Chuck Grassley , R-Iowa, floated an idea simply to require employers to report their health care spending on workers' W-2 forms. Both were stymied by an odd-bedfellows alliance of employers and unions.

It's not too late. If employers listed the cost of health care alongside the bite taken by payroll taxes on each paycheck, it would be much clearer to workers that coverage was coming out of their wages, not their employers' largess. That could help them see the costs of the system more clearly, which is something all the congressional debate isn't helping anyone do.