Conservatives say health costs drive income inequality

Income Inequality and Rising Health-Care Costs

By Mark J. Warshawsky and Andrew G. Biggs
The Wall Street Journal, October 6, 2014

A new Kaiser Family Foundation survey reports that health-insurance premiums rose by a “modest” 3% in 2013. Even more modest, however, was the 2.3% growth of workers’ earnings last year. These figures merely illustrate a long-term trend of rising health costs eating away at wages. The real story is even more dramatic: Government data show that health costs are the biggest driver of income inequality in America today.

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what seems to have happened: Bureau of Labor Statistics data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

But here’s what the news headlines miss: Rising health costs don’t affect every employee the same. An average family health policy today costs employers nearly $12,000 per year, up from only $4,200 in 1999. Had employer premiums not risen, average salaries today would be around $7,800 higher. For a lower-income worker who today makes $30,000, that could have meant a 26% salary increase. By contrast, a “one percenter” making $250,000 today would have seen his earnings rise only by 3.1%. Health costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most. The result is higher income inequality.

These data give us a different perspective on the inequality debate. Most people think of income inequality as money “redistributed” from the poor to the rich. In reality, much of what we’re seeing is more of low-income workers’ compensation going toward their health benefits and less ending up in their pockets. That’s a different problem and points toward different solutions.



By Don McCanne, MD

This WSJ opinion article is from the conservative American Enterprise Institute (AEI). When they say that “health costs are the biggest driver of income inequality in America today,” this should provide us with common ground to simultaneously address both income inequality and the health care crisis.

Unfortunately, in this article the authors further define the problem as over-insurance and a need for high-deductible health plans. Reducing benefits and increasing cost sharing would make the problems even worse for low- and moderate-income individuals and families.

Nevertheless we can agree that the current inequities in health care financing - which were inadequately addressed through the Affordable Care Act - are a significant contributor to income inequality. The most effective solution to address both would be to enact a progressively-financed single payer national health program (though further public policies would be required to temper the extremes of income and wealth inequality).

There is a glimmer of hope when the opponents of single payer recognize the problems, but that hope is dashed when they revert to ideological approaches that place an even greater burden on those more vulnerable.