The Health Insurance Problem

The NYTimes has a story today on the rising cost of health insurance, and its role as a factor making firms reluctant to hire more workers. The price of health insurance has indeed risen remarkably fast recently, on par with the rates of increase in the early 1990s. The graph below also illustrates the pause in the rise of the cost of health insurance in the mid 1990s, which was due to the one-time transformation of the majority of health insurance plans to cheaper HMOs. That approach to solving the rising cost of health care has now run its course, and it is unlikely that we’ll see any effective new measures to control the cost of health care in the near future.

Note one important caveat to this data, however: the data only shows average health care costs paid by employers. It does not measure the total expenditures on health insurance, because it has no way to account for the greater share of health insurance costs that are being paid by employees. So this chart may significantly understate the true rise in health insurance costs.

One result of the recent rise in health insurance costs is that workers are receiving a smaller share of their total compensation in the form of take-home pay. The following chart shows how much of the average worker’s compensation comes in the form of wages and salaries. It is currently nearing its all-time low of the early 1990s, and without any major changes to health care in the US, will surely surpass that level before long.

The health care problem in the US is big, and getting bigger. While one aspect of that is that more and more people must go without health care, an equally important aspect is the fact that “after-health care” disposible income will continue to fall, as health care costs eat up more and more of individuals’ compensation. I don’t see any good solution to this incessant march in health care costs without a major, MAJOR overhaul of how this nation provides health care to its citizens. When the situation gets bad enough in the US, there will probably be political pressure to enact such changes, maybe in another 5 to 10 years. But until then, we’ll have to deal with what we have.