The $750 Billion Hole in Your Pocket

If you want the clearest example of the downfall in workers' pay, you'd have a hard time coming up with a better one than this:

Source: St. Louis Fed.

Former White House budget director Peter Orszag recently explained in Bloomberg: "If labor compensation hadn't fallen so much as a share of national income, American workers would be enjoying about $750 billion more in take-home pay."

Where did that $750 billion go? Some of it transferred to corporate profits as the balance between labor and capital shifted. But that doesn't explain everything. Wages as a percent of GDP have declined by 9 percentage points since 1970, while corporate profits have increased about 6 percentage points of GDP.

A big part of the decline is linked to the rise in health-care costs. And we're not getting much out of it. "Estimates suggest we are currently spending about that much [$750 billion] each year on health-care costs that don't improve health outcomes -- and this unnecessarily depresses take-home pay," Orszag writes. 

He was referring to a recent study by the Institute of Medicine, which tallied up $750 billion in annual health-care costs it deemed "excessive." The report wrote: "There is evidence that a substantial proportion of health-care expenditures is wasted, leading to little improvement in health or in the quality of care." It breaks excess down into six categories:

Category

Services

Estimated Annual Cost

Unnecessary services

Overuse, discretionary use beyond benchmarks, unnecessary use of higher-cost services

$210 billion

Inefficiently delivered services

Mistakes and errors, care fragmentation, operational inefficiencies

$130 billion

Excess administrative costs

Insurance paperwork costs beyond benchmarks, administrative inefficiencies

$190 billion

Excessive prices

Services beyond competitive benchmark, product prices beyond benchmark

$105 billion

Missed preventative opportunities

Primary prevention, secondary prevention, tertiary prevention

$55 billion

Fraud

Payers, clinicians, patients

$75 billion

Source: IOM.

Now, a lot of these assumptions can be picked at. It's easy for an analyst crunching numbers to tally up what he or she thinks is "unnecessary" care. But tell that to people worried about their health. Motley Fool analyst Seth Jayson wrote last year: "If you or a loved one finds a lump in a breast, you don't want to be told it's probably OK. You want it out, or taken care of -- even if there's no concrete proof that this will bring better health." James Surowiecki of The New Yorker put it another way: "Markets work only when consumers have the power to say no if the price isn't right. Yet it's very hard for people to say no in the case of things like end-of-life care or brain surgery."

Regardless of what's waste and what's necessary, we know the price of medical care has surged. We also know that surge has taken a nasty bite out of wages. The decline in wages as a percent of total compensation over the past 12 years has been matched almost perfectly by the rise in employer-provided health-insurance premiums:

Source: Bureau of Labor Statistics.

But here's what I find interesting.

Growth in health-care costs is now near the lowest levels of the past 50 years. It's happening across the spectrum -- in per-enrollee Medicare growth, and with private insurance premiums. Over the past 30 years, Medicare costs per enrollee have grown an average of 2 percentage points above growth in per capita income. In the past year, costs per enrollee have been roughly flat, while income per capita has risen about 3% -- one of Medicare's best cost containments ever. According to the Kaiser Family Foundation, private insurance premiums grew 4.4% last year, which is half the 12-year average. "Premium growth is at historic lows, which greatly benefits workers," said Maulik Joshi of the American Hospital Association.

Some of the biggest cost-growth improvements have come from states that weren't hit hard by the recession, so it's unlikely the slower growth is entirely due to a weak economy. Much of it, fingers crossed, is a long-last reduction in waste and unnecessary treatment as cost becomes more of a limiting factor. If that trend continues, the weight that has held wages down over the past several decades -- a $750 billion weight -- may begin to lift. 

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Read/Post Comments (8) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 31, 2012, at 9:39 AM, slpmn wrote:

    I wonder if any measureable portion of the drop in premium growth is from a transition to high deductible plans combined with an HSA account. Two years ago, our company started offering that option and I decided to go that route and it substantially lowered my premiums. The offset is that we pay for basic services out-of-pocket now. Overall, we still come out ahead, but the reality is, we're paying a lower premium because we have less coverage, not due to any fundamental change in the cost of health care.

  • Report this Comment On November 02, 2012, at 11:08 AM, tomdiane1 wrote:

    The author did not even address the costs of liability in the health care industry, and many of the underlying reasons for the high cost is the threat of lawsuits when something does not go as planned. The insurance doctors and health care providers must have throws their cost very high.

  • Report this Comment On November 02, 2012, at 11:48 AM, jrj90620 wrote:

    Take good care of your health and avoid the ripoff.

  • Report this Comment On November 02, 2012, at 12:12 PM, czbill12 wrote:

    good points, and we too have CDHP...consumer driven Health Plans with more Out of pocket and higher deductibles. It really is a nightmare ROI these days to compare a company's plans if you have one, even if you're with a large company. Also, think about this--the raises here as companies offload more of this cost to individuals essentially negate most raises...ergo, the decline in true net earnings.

  • Report this Comment On November 02, 2012, at 12:13 PM, czbill12 wrote:

    correction--raises in healthcare costs negate bonuses and other merit increases for employees

  • Report this Comment On November 02, 2012, at 12:37 PM, eric7323 wrote:

    the loss to this country and the rest of the world is created by haliburton ,look it up they controll the republican party, they have already distroyed us, if Romney gets in we are dead.

  • Report this Comment On November 02, 2012, at 12:57 PM, eric7323 wrote:

    the are in over 40 states, there business is creating weapons of mass distruction, bush Chaney and several others are part owners in this co. so they create wars to support it, like 10 year wars for non existing weapons of mass distruction and no one can see the war is the mass distruction and the depression the jobs and property loss, its rite under your nose yet no one can see it. in god we trust! never trust a republican. this game has been going on since ww-2 ,and is our main problem, must be wasted for survival we now have 50 times more weapons of mass distruction than rest of world combined, look it up

  • Report this Comment On November 02, 2012, at 1:11 PM, eric7323 wrote:

    we are still crashing (perpetual) and will take years to fix republicans are blaming Obama they set him up for tis reason, all they want is control the u.s.a. does not matter !!! it hasnt since ww-2, since there was no weapons found the created 9-11 to save face and the party ! and write under your nose is anbodybody home, wake up america.

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