Why health insurance could cost employees a raise
For 2017, PwC’s Health Research Institute projects a 6.5% growth rate in medical cost trends, the same as in the current year. They also report signs that the decade’s slowing medical cost growth rate could tick back up as new healthcare access points increase utilization.
Alex Tolbert is the founder of Bernard Health, a company that provides advice about health insurance to individuals and organizations. Tolbert recently talked to EBN about why healthcare costs in the U.S. continue to escalate and how those increases are impacting employees’ wage and salary increases.
EBN: PwC predicts medical cost increases of 6.5% for 2017. Is this more or less than cost increases experienced by your clients?
Tolbert: We are seeing increases as high as the 50% range in the small and medium-sized employer market. In part, this is because some plans that were grandfathered have to move to age-rated plans instead of plans underwritten based on the employer’s group health risk.
EBN: Would you say price increases or utilization are the most significant forces driving the growth in U.S. healthcare costs?
Tolbert: On some level, it’s both. But I think over the next 10 to 20 years it will be utilization because as the baby boomers get older they will need more health care.
EBN: In your view, what is the link between salary increases and healthcare costs?
Tolbert: When employers budget for employee compensation, the amount has to cover a lot more than employee wages. It includes taxes and employee benefits. So as healthcare costs increase, these expenses eat into how much of the compensation expense budget is available for cash compensation.
EBN: In a recent Bernard Health blog, you say that many believe healthcare spending is a driving factor of the United States’ 35-year wage stagnation trend. Can you expand a little bit upon what this means?
Tolbert: Graphs produced by research groups illustrate that middle class wages have stagnated over the last few decades, but they don’t take into account the compensation that people are getting in the form of healthcare benefits.
EBN: Are higher- or lower- paid employees most impacted by the relationship between salary and health insurance?
Tolbert: There is a greater impact on lower-paid employees because healthcare costs are a bigger percentage of their overall compensation package. To take a really extreme example, if the healthcare cost per family is $10,000 and you make $1 million/year and one of your colleagues makes only $30,000/year, this amount represents only 1% of your pay package but 25% of his.
EBN: Why are employers motivated to provide a significant or large part of compensation in the form of health benefits instead of cash?
Tolbert: Employers do not have to withhold Federal Insurance Contributions Act (FICA) payroll taxes from the amounts they pay for employee healthcare premiums or pay the employer’s matching portion of these taxes. FICA is comprised of: a 6.2% Social Security tax; a 1.45% Medicare tax (the “regular” Medicare tax); and, since 2013, a 0.9% Medicare surtax when the employee earns over $200,000 (no employer contribution required).
EBN: The Kaiser Family Foundation reported in 2014 that 75% of employees working for small employers not currently offering health benefits would prefer $2/hour more in wages than health insurance. Is there a specific age group or demographic cohort that would prefer to receive cash?
Tolbert: Well, I think it’s just a question of perceived value. Anyone who doesn’t think they are getting a lot of value from their health insurance would prefer cash instead. I guess younger, healthier people would be less likely to see value in health insurance than those who need it.
EBN: Dr. Hank Gardner, the CEO of the HCMS Group, says the key to resolving wage stagnation is to reduce healthcare waste including overtreatment by medical providers and overconsumption by patients with risky narcotics at the top of the list. Do you agree?
Tolbert: Yes, I do. We are not getting the value for our healthcare dollar that other countries are. There is waste and overconsumption. I believe that ultimately more involvement from all of us as citizens is what will help address that. I think that the “direct primary care model” (DPC) is really the most important step toward that.
The DPC model gives family physicians a meaningful alternative to fee-for-service insurance billing, typically by charging patients a monthly, quarterly or annual retainer that covers all or most primary care services including clinical, laboratory and consultative services, care coordination and comprehensive care management. Because some services are not covered by the annual fixed fee, DPC practices often suggest that patients acquire a high-deductible wraparound policy to cover emergencies.