Productivity Rewards and Pay Illusions with Benefit Cost Increases Sylvester J. Schieber, Ph.D. 11...

Productivity Rewards and Pay Illusions with Benefit Cost Increases

Sylvester J. Schieber, Ph.D.

11th Annual RRC ConferenceIssues for Retirement Security10 August 2009Washington, DC

Overview

Background– Health reform looks likely– Likely to present certain employment related costs– Already concerns that wages aren’t growing properly

The Compensation Puzzle in the Picture

Intermediate Term Outlook on Benefit Costs

Future Productivity Rewards under Alternative Health and Entitlement Reform Scenarios

Conclusions

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Rich Environment for Policy Change

Health Reform

President Obama is pushing hard

Five Congressional Committees moving forward

Current Congressional recess: building backbone or causing gastric distress?

Russell Long and the theory of government finance

Who pays for health reform?– President Obama says he will not sign a bill that creates a large

increase in the deficit– Many calls for employer mandates, taxes on benefits and

curtailing public plan costs with prospects of cost shifts to employer-sponsored plans

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Concerns with Recent Compensation Outcomes

Stagnation in Income Growth in Middle Classes in Early Part of the Decade

Concerns mounting that compensation for lower and middle-earners not commensurate with productivity contributions

Evidence is cited of flat earnings levels and higher unemployment in the middle of the earnings spectrum over last economic cycle

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The Composition of Compensation

In 1995, total compensation paid to workers in the United States was $19.40 per hour on average

– 82 percent was cash wages, salaries or bonuses– 12 percent was paid in the form of retirement or health benefits– 6 percent was paid in as social insurance contributions to

government

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Growth in Hourly Productivity and Compensation Elements 1995-2007

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75.0

100.0

125.0

150.0

1995 1997 1999 2001 2003 2005 2007

Wage

Pen/Health

ER Soc Ins

Productivity

Value of productivity and compensation elements set to 100 in 1995

Source: Derived from unpublished data from the Office of the Actuary, Social Security Administration. Wages, and benefit costs were converted into constant dollars using the GDP deflator.

Compound Annual Growth Rates in Inflation-Adjusted Hourly Compensation for Full-Time Full-Year Workers

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Pay levels are in deciles

Source: Watson Wyatt Worldwide tabulations of the Current Population Survey, various years.

Compound Annual Growth Rates in Inflation-Adjusted Hourly Pay for Full-Time Full-Year Workers

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Compound Annual Growth Rates in Inflation-Adjusted Social Insurance Contributions for Full-Time Workers

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0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1 2 3 4 5 6 7 8 9 10

1980-1990

1990-2000

2000-2007

Compound Annual Growth Rates in Inflation-Adjusted Retirement Benefits for Full-Time Workers

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Compound Annual Growth Rates in Inflation-Adjusted Health Benefits for Full-Time Workers

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Share of Compensation Gains Provided as Benefits for Selected Periods

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Earningsdecile 1980-1990 1990-2000 2000-2007

1 100.0% 29.5% 29.1%2 100.0% 22.2% 44.6%3 87.0% 24.2% 48.9%4 52.7% 20.5% 59.6%5 61.8% 17.2% 53.6%6 41.7% 18.3% 54.5%7 46.9% 12.1% 50.2%8 35.5% 9.5% 49.7%9 29.0% 7.8% 43.8%

10 20.8% 6.9% 78.0%

Source: Steven A. Nyce and Sylvester J. Schieber, “Productivity Rewards, Pay Illusions Caused by Retirement and Health Benefit Cost Increases,” Watson Wyatt, August 2009.

Share of Compensation Gains Provided as Benefits for Selected Periods

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Earningsdecile 1980-1990 1990-2000 2000-2007

3 87.0% 24.2% 48.9%

5 61.8% 17.2% 53.6%

8 35.5% 9.5% 49.7%


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Intermediate Term Outlook on Benefit Costs

Social Security and Medicare HI Income and Costs as a Percentage of Covered Payroll

17Source: Office of the Actuary, Social Security Administration.

Percent of covered earnings

Average Funded Status and Contributions to DB Plans for 2000 to 2006 and projected for 2007 to 2010

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Percent funded Contributions (billions $)

Source: “The Future of DB Plan Funding Under PPA, The Recovery Act and Relief Proposals,” Watson Wyatt Insider, January 2009. Note: (*) projected

Employer Contributions to DC Plans in Millions of Dollars from 1990 through 2007

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Source: U.S. Department of Labor, EBSA, “Private Pension Plan Bulletin Historical Tables and Graphs,” February 2009.

Whither Goes Health Care Costs under Health Care Reform?

Highly inflationary cost environment possibly augmented with expanded demand

Where are the cost savings coming from?– Productivity improvements in the delivery sector– Added contributions for those not now covered– Reengineering of the health delivery sector

The Medicare experience– Expected inflation to moderate– Expected demand to be flat– … and then there’s more…

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Actual Wage Growth, Expected and Actual Hospital Cost Growth under HI

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Annual rates shown against base of 100 in 1966

Sources: Average wages were taken from the Average Wage Index series developed by the Office of the Actuary, Social Security Administration; average daily hospital charges and reimbursement rates were taken from the Social Security Bulletin Annual Statistical Supplement, 1976, p. 178, Social Security Bulletin Annual Statistical Supplement, 1981, p. 209 and Social Security Bulletin Annual Statistical Supplement, 1993, p. 311.

Actual and Estimated Hospital Utilization Rates per Aged Enrollee Under the Medicare HI Program for Selected Years

22Source: See Nyce and Schieber, p. 39.

Hospitalization days per enrollee

Completing the Trifecta: Unexpected Inflation, Unanticipated Utilization… and then Expanded Coverage

Anyone receiving a DI benefit for 24 consecutive months was given coverage

Anyone with end-stage renal disease who had been on dialysis for three months was covered

By 1984, these two groups comprised 18 percent of the caseload

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Future Productivity Rewards under Alternative Scenarios

Baseline Assumptions

Productivity increases 1.7 percent per year

Retirement plan costs stay high until 2012 and then grow at rate of growth in wages

Health costs grow at rate of growth in compensation plus 1.5 percent per year down from 3.2 percent from 2000-2007

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Baseline Projections of Annual Wage Growth Rates across Earnings Deciles for Selected Periods

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2007 to 2015 to 2007 toIncome Deciles 2015 2030 2030

All 0.88% 1.10% 1.02%

1 0.99% 1.01% 1.00%2 0.94% 1.01% 0.98%3 0.89% 1.00% 0.96%4 0.85% 1.00% 0.95%5 0.84% 1.02% 0.96%6 0.84% 1.05% 0.97%7 0.84% 1.07% 0.99%8 0.84% 1.09% 1.00%9 0.86% 1.12% 1.03%

10 0.91% 1.17% 1.08%


Scenarios

Baseline assumptions: health costs grow at rate of growth in compensation plus 1.5 percent per year

Scenario 1: Assume that workers not covered by health insurance are mandated to be covered

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Annual Compound Average Wage Growth until 2015

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Health inflation Expanded All Third Median Eighth rate above coverage workers decile decile decile

wage growth

Baseline 1.5% No 0.89% 0.89% 0.84% 0.84%

Scenario 1 1.5% Yes 0.63% 0.15% 0.59% 0.76%


Annual Compound Average Wage Growth from 2015 through 2030

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wage growth

Baseline 1.5% No 1.10% 1.00% 1.02% 1.09%

Scenario 1 1.5% Yes 1.06% 0.88% 0.98% 1.08%


Scenarios

Baseline assumptions: health costs grow at rate of growth in wages plus 1.5 percent per year


Scenario 2: Coverage is expanded and recent health inflation rates persist

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wage growth

Baseline 1.5% No 0.89% 0.89% 0.84% 0.84%

Scenario 1 1.5% Yes 0.63% 0.15% 0.59% 0.76%

Scenario 2 3.2% Yes 0.42% -0.25% 0.29% 0.55%



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wage growth

Baseline 1.5% No 1.10% 1.00% 1.02% 1.09%

Scenario 1 1.5% Yes 1.06% 0.88% 0.98% 1.08%

Scenario 2 3.2% Yes 0.68% 0.11% 0.43% 0.71%


Scenarios




Scenario 3: Coverage is expanded and health inflation rate increases to compensation growth rate plus 6 percent per year

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wage growth

Baseline 1.5% No 0.89% 0.89% 0.84% 0.84%

Scenario 1 1.5% Yes 0.63% 0.15% 0.59% 0.76%

Scenario 2 3.2% Yes 0.42% -0.25% 0.29% 0.55%

Scenario 3 6.0% Yes -0.16% -1.24% -0.48% -0.01%



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wage growth

Baseline 1.5% No 1.10% 1.00% 1.02% 1.09%

Scenario 1 1.5% Yes 1.06% 0.88% 0.98% 1.08%

Scenario 2 3.2% Yes 0.68% 0.11% 0.43% 0.71%

Scenario 3 6.0% Yes -0.96% -3.68% -2.03% -0.86%


Scenarios




Scenario 3: Coverage is expanded and health inflation rate increases to compensation growth rate plus 6 percent per year

Scenario 4: Coverage is expanded and recent health rates persist and Social Security and HI reform is heavily tilted toward payroll tax increases

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wage growth

Baseline 1.5% No 0.89% 0.89% 0.84% 0.84%

Scenario 1 1.5% Yes 0.63% 0.15% 0.59% 0.76%

Scenario 2 3.2% Yes 0.42% -0.25% 0.29% 0.55%

Scenario 3 6.0% Yes -0.16% -1.24% -0.48% -0.01%

Scenario 4 3.2% Yes 0.27% -0.42% 0.12% 0.39%



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wage growth

Baseline 1.5% No 1.10% 1.00% 1.02% 1.09%

Scenario 1 1.5% Yes 1.06% 0.88% 0.98% 1.08%

Scenario 2 3.2% Yes 0.68% 0.11% 0.43% 0.71%

Scenario 3 6.0% Yes -0.96% -3.68% -2.03% -0.86%

Scenario 4 3.2% yes 0.43% -0.21% 0.15% 0.45%


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Getting the Horse in Front of the Cart

Advisory Board Project

Meeting with Dr. John Wennberg on the Dartmouth Atlas Projec t– Effective care – evidence based care anyone

with need should routinely receive– Preference sensitive care – cases where

alternative routines with varying risks are appropriate and patient should be involved in “informed choice” decision on treatment path

– Supply-sensitive care

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Meeting with Dr. John Wennberg on the Dartmouth Atlas Projec t– Effective care – evidence based care anyone with

need should routinely receive– Preference sensitive care – cases where alternative

routines with varying risks are appropriate and patient should be involved in “informed choice” decision on treatment path

– Supply-sensitive care – see the article in the June 1, 2009 New Yorker comparing treatment patterns in McAllen and El Paso, Texas under Medicare

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Meeting with Dr. John Wennberg on the Dartmouth Atlas Projec t– Effective care – 12 percent of Medicare services– Preference sensitive care – 25 percent– Supply-sensitive care – 63 percent

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Meeting with Dr. John Wennberg on the Dartmouth Atlas Projec t– Effective care– Preference sensitive care– Supply-sensitive care

Dr. Brent James, Health Care Delivery Institute at the Intermountain Health Care System in Utah– Developing evidence to support the delivery of

effective care– A case study

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Analysis of Complications Associated with Induced Labor Deliveries of Babies

Complication rates associated with timing– 6.66 percent of babies ended up in ICU at 37

weeks– 3.36 percent at 38 weeks– 2.47 percent at 39 weeks

Notified doctors, empowered nurses to change procedures

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Percentage of Live Births by Elective Induction at Less than 39 Weeks Gestation at Intermountain Health Care System

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C-section rates dropped from roughly one-third to 12 percent on first births and 20 percent overall.

C-Section Births in South Florida

Costs– C-sections cost between $11,000 and $30,000

per live birth– Normal deliveries cost between $5,000 and

$16,000

Rates– John Dorschner, “More S. Florida babies born by

an appointment,” The Miami Herald (May 10, 2009, Early Edition), Health and Medicine Section, Page 1.

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The 2008 C-Section Rates in Miami

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PercentageMiami-Dade

C-sectionsTotal births

c-sectionsCounty

Kendall Regional 1,534 2,180 70.4%Hialeah 871 1,657 52.6%South Miami 2,483 4,145 59.9%Baptist 2,221 4,416 50.3%Mercy 803 1,384 58.0%Mount Sinai 944 1,944 48.6%North Shore 847 2,016 42.0%Palmetto General 959 2,005 47.8%Homstead 758 1,522 49.8%Jackson Memorial 2,786 5,524 50.4%Jackson North 626 1,704 36.7%

Total 15,336 29,969 51.2%

Atul Gawande on McAllen and El Paso Medicare Treatment Patterns, 2001-2005

Critically ill patients received nearly 50 percent more specialists visits in McAllen

Were 2/3rds more likely to see 10 or more specialists in a six month period

Received– 20 percent more echocardiography tests– 200 percent more nerve conduction studies– 550 percent more urine flow studies– One-fifth to two-thirds more

Gallbladder operations Knee replacements Breast biopsies Bladder scopes

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Atul Gawande on McAllen and El Paso Medicare Treatment Patterns, 2001-2005

Received– Two to three times as many

Pacemakers Implantable defibrillators Cardiac bypass operations Carotid endarterectomies Coronary-artery stents

The cost in McAllen was $15,000 per enrollee versus $7,500 in El Paso

There was no discernable difference in the outcomes in the two cities

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Dr. Brent James of Intermountain Health System

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“If health reform is just about expanding health insurance coverage without addressing the delivery issues in the current health care system, it will simply be pouring gasoline on an open flame.”

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Conclusions

Conclusion

A 1 percentage point increase in health benefits costs today costs 2.25 times the amount of cash wages that it did in 1980

If we could cut health inflation back to 1990s levels, we would likely see 1990s wage growth rates

If we do not throttle back health inflation, median workers can expect long-run wage growth only about 40 percent of that in the 1990s

If health reform ramps up inflation, we could see wage losses over most of the earnings spectrum

Entitlement reform is a further risk and complication in assuring workers’ prosperity in the future

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Outlook for the Future

If health inflation persists at recent rates, cash wages likely will not grow at rates that persisted during the 1990s even if health reform fails

Health care reform is a crucial consideration for the future prosperity of U.S. workers

We need to be careful about getting the cart (expanded coverage) in front of the horse (workers’ ability to pay and improve their living standards

The prospects for workers improving their standards of living and their ability to save for retirement hinge on the outcome in the current health care reform deliberations

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Questions and Answers

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Productivity Rewards and Pay Illusions with Benefit Cost Increases

Sylvester J. Schieber, Ph.D.

11th Annual RRC ConferenceIssues for Retirement Security10 August 2009Washington, DC

Productivity Rewards and Pay Illusions with Benefit Cost Increases Sylvester J. Schieber, Ph.D. 11...

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