Debunking the EPI on the excise tax

The Economic Policy Institute report titled "Employer Health Care Costs Do Not Drive Wage Trends" has become the definitive study for those who oppose a "Cadillac (excise) tax" on expensive group (employer-provided) health insurance plans.  The EPI report has been cited by prominent bloggers on websites like Daily Kos and MyDD to "debunk" the supposed "myth" that health care costs are not a factor in wage growth or decline.  Well, it turns out that EPI gets it wrong on several fronts on the data and interpretation of the data alone.  Their conclusions, to say the least are at best simply mistaken.

The EPI's report is based on three fundamental (and as I will demonstrate, mistaken) claims.

Claim One: "Health care costs are not large enough to substantially move wages."

It is easy to understand that health care cost trends have not been a significant driver of wage trends when one examines the scale of employer expenditures on health care. Health care costs were just 7.6% of total compensation and 9.4% of total wages (all wages paid, including premium pay, paid leave, and so on) in 2007.

Reading this, my first thought was a bit of disbelief.  Really?  Health care costs are just 7.6% of total compensation?  If that's true and the cost of health care is that small a portion of total compensation, why would employers sweat the extra tax on a few of their employees' policies - or even all of them, if they offer Cadillac plans to all employees and they all pick it?  Second question: if you're an employee whose employer provides health care and you know how much it costs, does it sound like less than 10% of your wages (at least for the employer portion)?  This would mean that your annual wages are over $230,000 if you have a family plan eligible for the excise tax, or over $85,000 if you have an individual plan that qualifies for the excise tax; if your employer puts in all of your premium, slightly less, but still a very substantial salary if you put in part of it.

But here is the bigger question.  Is this true?  The answer: of course not.  You see, the EPI uses data from the Bureau of Labor Statistics (BLS).  So far so good.  And the data says that at the end of 2007, the employer cost for total compensation per hour per employee was $28.11 and total health insurance cost per hour per employee was $2.21.  Turns out that's actually 7.9%, but whatever.  By September 2009 (latest BLS data available), the number climbs to 8.1%.  But here's the real problem: this is the cost for all employers put together and then averaged.  But as we know, not all employers provide health coverage.  So there were tons of employees who made wages but no health benefits as part of their compensation and they are averaged within that 8.1%.  In fact, the Kaiser Foundation's most recent survey found that only 59% of the workers were covered by employer-sponsored health insurance in 2009.  So that 8.1% expenditure is spread among 59% of workers, not 100%.

Adjusting for this factor, for the employees who do have employer-provided coverage, the cost of health insurance per employee per hour climbs to 14% of total compensation in 2009.  And as a portion of wages only, it was 20% in 2009.  And that's for your employer's side of the cost alone.  It doesn't even count the employee contributions.  That's also just the average.  I would expect this percentage to be higher for employers who do provide high-premium plans.  Moreover, under the status quo, these trends are heading up.  Now does it look like health care costs are, as the EPI put it, "large enough" to move your wages?  By the way, that figure of the average employer plan costing 20% of your wages?  It matches up quite nicely if you consider that in 2008, the average family health plan cost $12,298, or about 18% of the median income for a family of 4 that year, $67,019.  Yes, I know I'm doing a little rough justice by using the mean for one number and the median for the other (sorry for all the wonk talk), but I can't find the median in 2008 for a family plan, so I'm having to assume the mean is the median there.

[Note: these numbers can be further adjusted if someone can find the wages and benefits specific to employees with health benefits rather than all workers. However, I don't think it would change the calculations much, and it is entirely unclear in which direction.]

All of their numbers have to be similarly adjusted for the report to make any proper numerical sense.  You cannot fail to factor in the severe problem of declining portion of Americans being covered by employer-based insurance.

EPI also claims that total benefits as a percentage of total compensation are constant and that employers just move money around:

Further, overall benefits’ (health care plus all other fringe  benefits) share of total compensation has actually been stable for the  last 20 years or so—as health costs expanded, pension and payroll tax  shares diminished.

This is true (well it's true for the part that we have data for among  those 20 years, which is about 5, anyway) , according to the Bureau  of Labor Statistics, which is where EPI's end-notes indicate they  obtained the data from.  However, what are these benefits, aside from  health insurance?  Apart from the legally required ones such as paying  half your payroll taxes (not income taxes), here is a full list, with  September 2009 percentage of total compensation in the parentheses:

  • Paid leave: vacation, holidays, sick and personal days off (6.9%)
  • Supplemental pay: overtime, shift differentials and bonuses (2.9%)
  • Retirement benefits [stop laughing!] (4.4%)
  • Other insurance: life, short and long-term disability (0.5%)
  • Other (0.1%)

It should jump out at anyone that the the top two items on this list  are actually cash benefits!  These are things you receive in your  paycheck.  You can either take a vacation or cash in your vacation  time.  You get a check for either!  Overtime, shift differentials and  bonuses are obviously cash.  If your health insurance cost can be kept  in check, and as EPI suggests, your health insurance money is  redistributed to your "other benefits", it is more than likely that you will get more cash, more take-home pay.   That is essentially a wage increase if your employer offers you  more overtime or more time off.

Retirement benefits are also essentially cash.  They are deferred  wages.

So out of the non-health insurance, non-legally mandated  benefits, 95% are cash or deferred wage benefits.  66% are direct cash  benefits (paid leave and supplemental pay) that put money in your  paycheck.

Also notice that last part: "as health costs expanded, pension and payroll tax shares diminished."  When do payroll taxes (i.e. social security, medicare, etc.) diminish?  When the payroll - i.e. your total income (wages, bonuses, paid leave, overtime, etc. - anything your employer has to pay a payroll tax on) diminishes.  So even if your 'wages' technically do not diminish, EPI is admitting that monetary compensation (deferred, i.e. pension, or current, i.e. paid leave, bonuses etc.) do in fact dip downwards when health costs expand.  Note that this is not indicative of lay-offs, since these numbers are per employee per hour.

In addition once again, there is the data  problem.  There are a significant amount of employers who fall into 3  categories:

  1. Employers that offer health insurance and other benefits such as a  retirement plan, long term care insurance, etc.
  2. Employers whose only major benefit is health insurance
  3. Employer who offer no or next to no benefits at all

And a breakdown of how much employers in each of those categories spend on  total benefits vs. wages would be interesting to see.  However, EPI does  not give us any such thing.  As a result, we see the crowding out  effect - firms which have no voluntary benefits being averaged with firms  that have some or a lot of voluntary benefits.  It would stand to  reason that firms that provide a lot of additional benefits beside  health care would have to spend more than the 29-30% average noted in  the BLS report, in order to balance out the firms that have none.

EPI's report's second pillar: "Examination of actual wage and benefit trends confirms that changes in the trajectory of health care costs did not materially affect wage trends over the last 20 years."  To make this point, EPI uses this chart (partial chart below) to demonstrate how the costs of wages, benefits (specifically health benefits) have changed through three periods:

Once again, the EPI uses market-wide changes in wages and benefits without any regards to the fact that not every employee has benefits, and without consequently adjusting the numbers.  There is no way for me to redo these numbers without having the originals from which the EPI built this table.  The original shares of workers who had employer based coverage in those years is absolutely crucial, and that data is missing.  But based on my analysis above, I would not expect these numbers to be very reliable, except for the trend (i.e. when it went up and when it went up more).  The EPI is adding wage data, which every employee has, and pitting them together against health insurance premium data, which not every employee has.  Without accounting for this, the calculations cannot meet the test of reliability.

But, more importantly, this table showing only the changes in three periods over the span of 1989 to 2006 does not tell you anything about whether or not your total cash take-home pay would be more if health insurance costs were controlled.  At best, it tells you that cost of health insurance has been a drag on employers (and your take-home cash compensation) for a really, really long time.  That shouldn't come as a surprise to anyone, since in the current debate, some have suggested that Democrats should have made a deal with Nixon on health care back in the 1970s.  The health care situation that is a gigantic crisis threatening to blow a hole through our economic fabric did not start in the last couple of decades.  It has been accumulating over a very long time.

Granted, not the entirety of wage increases or decreases or stagnation can be accounted for by health insurance costs to one's employee, and the effects can be overstated if one is not careful.  But there is no way to avoid facing up to the idea that it is in fact a major factor.  Actually, EPI kind of demonstrates this for us:

But the lessons of the 2000s are also instructive: despite the faster productivity growth there has been no real wage growth recently,

Hmm, so in the 90s, productivity growth drove wage growth (and it did, but note that health care costs were also held to smaller increases), but no real wage growth in the 2000s despite faster productivity growth.  I wonder what might have contributed to that.  Oh look, between 2000 and 2006, of the three periods in the above table, health care costs rise the fastest.

EPI's third claim:

The wage behavior described—accelerating in the late 1990s and more slowly thereafter— actually best characterizes wage growth for low-wage workers who have minimal access to employer-based health care. Conversely, this pattern of wage-growth over time is least pronounced for higher paid workers with the most health coverage.

They also note that in the 2000s, it's the poor and the middle class whose wages were stagnated or reduced, not that of the high income earners.  According to the report, only 27% of workers in the bottom fifth of income earners and 64% of workers in the middle fifth had employer provided health insurance, whereas 80% of the top fifth of income earners had health insurance.  The data certainly bears this out.  During the boom of the 1990s, the poor and middle class had the most to gain.  In the 2000s, they had the most to lose.  But the conclusion EPI draws from it, namely that this means that wages are not significantly influenced by health care costs of the employer, is not obvious, nor, in my judgment, reasonable.  Just because higher income earners have the most coverage does not mean their wages are not suffering because of the costs.  I will demonstrate:

It should be noticed that we are looking at data about wages and what percent of what kind of income earners get employer provided coverage over an 18-year period, but we are not told whether coverage proportions in each income category held steady, rose, or declined. EPI does not reveal that for the middle-class, the availability of employer provided coverage has been on a solid downhill curve.  Their coverage is being dropped, or their portion of the premiums are growing, and small businesses are struggling to keep their employees on the payroll and provide them insurance.  Think I'm making it up?  An article by EPI's own Elise Gould in 2005 made this point clear as daylight:

Middle-income Americans between the ages of 25 and 54 were 26.7% more likely to be uninsured in 2004 than in 2000.

Indeed, the data included in that article shows an overall 2.9% decline in employer provided coverage between 2000 and 2004 alone, with the bottom fifth of workers' coverage declining by 2.9%, the second fifths' coverage declining by 4.9% and the middle fifth's coverage declining by 2.3%.  Even the top two fifths lost coverage in that period to the tune of 2.4% and 3%, respectively.  Also note from the first table from that report that blue collar workers lost health coverage at over 1.5 times the rate of white collar workers.  Let me point out that those declines were much bigger over the 18 year period EPI was discussing in its recent paper.  So, I do not really see how one can claim that health insurance premiums have no significant effect on wages while we are staring at data showing us that coverage has been declining among the high income earners and low income earners alike.  Yes, higher income earners remain the most likely to receive health benefits, it is undeniable that even for them, coverage has been on the decline.  If 20 years from now, only 50% of high income earners were covered and 10% of low income earners, I don't think that we can say then "hey, look, high income earners have the most coverage anyway, so health care costs are not affecting wages."

Another thing popped in my head when this argument came to my attention.  I will quote it once again for your convenience:

The wage behavior described—accelerating in the late 1990s and more slowly thereafter—actually best characterizes wage growth for low-wage workers who have minimal access to employer-based health care. Conversely, this pattern of wage-growth over time is least pronounced for higher paid workers with the most health coverage.

I stared at the highlighted parts for a while.  If this is true, does it not follow that EPI is fighting to protect the wealthier income earners from the effects of a tax that might be put on their insurance plans?  If it's the highest paid workers who have the most coverage, why the outrage about this affecting the middle class?  More to the point, isn't this trying to have it both ways -- indignantly protesting the excise tax on the claim that it will "hurt the middle class" and then turning around and saying "well, middle class wages aren't affected anyway because it's the high income earners who have the most coverage?"  I don't get it.  Shouldn't the Economic Policy Institute be fighting for more poor and the middle class people to get coverage and care instead of trying to protect those with the most coverage -- the high income earners, according to their own paper -- from a tax on their insurance companies (or passed down, employer) that might apply on some of their health plans over a certain threshold?  Their mission sure seems to be to fight for the poor and the middle class:

The Economic Policy Institute, a nonprofit Washington D.C. think tank,  was created in 1986 to broaden the discussion about economic policy to  include the interests of low- and middle-income workers. Today, with  global competition expanding, wage inequality rising, and the methods  and nature of work changing in fundamental ways, it is as crucial as  ever that people who work for a living have a voice in the economic  discourse.

EPI was the first — and remains the premier — organization to focus on  the economic condition of low- and middle-income Americans and their  families.

EPI also felt it important to disclose their funding sources:

EPI is a 501(c)(3) corporation. In 2005 through 2007, a majority of its  funding (about 53%) was in the form of foundation grants, while another  29% came from labor unions. EPI also receives support from individuals,  corporations, and other organizations.  

I must stress that my argument and this piece is based the substance, not the funding source of the issue brief I discuss here.  But I felt it important to mention given the recent funding fallouts that have contributed to a lot of attacks on the objectivity of MIT Prof. Jon Gruber.

So in the end, the EPI bases its campaign to oppose the excise tax on three claims, each of which is flawed and/or deeply questionable, and given that, none of those lead to the conclusions the EPI claims to.  They certainly do nothing to undo the validity of the support of the excise tax by three Nobel winning economists (Paul Krugman among them), 21 other prominent economists, the CBO, the JCT, the Center for Budget and Policy Priorities, and economic policy columnists of several newspapers including the Washington Post's Ezra Klein who finds a stronger correlation between wage growth and the growth-rate of the cost of employer-provided coverage than between wage growth and economic expansion.  The EPI brief does not negate their judgment that there is a tradeoff between wages and the cost of health insurance benefits.  While the cost of health insurance isn't the only factor in determining and driving wages, it is one of the major factors, and the EPI paper fails negate it.

Technical note: Emphases may be mine in quotes provided.

Self-plug: You can read this and other thoughts of mine  on my blog, The People's View.   You can also follow me on Twitter @thepeoplesview.

Thank you: Thank you for putting this on the rec-list!  Much appreciated.

Small Update: A comment by TheLizardKing on Daily Kos points out that not everyone is able to cash in their personal days instead of taking them off.  He is certainly correct, and I welcome the opportunity to clarify the nuance.  It is still a cash benefit in the sense that the payment for it (i.e. when you take a day off) shows up in your paycheck and doesn't disappear into the ether for paying for a 'benefit.'  That's what I meant.  And when employers cut down on personal days off, you may end up having to take an unpaid day off instead of a paid one.

Additional read: If you are inclined to read more about the Cadillac/Excise tax, I encourage you to read jim bow's excellent diary on Daily Kos, The Case for the Excise Tax.  It's a very well done piece and the first that I have read that provides an actual, real-life example of what one of these plans may look like.

Tags: excise tax, cadillac tax, health insurance reform, Health care, health care reform (all tags)

Comments

8 Comments

Great diary

This is an excellent diary, and I say that not in the sense that I agree with every word, but in the sense that it presents a real analysis that people can discuss.  This type of diary typically gets fewer comments than the broad polemic, but the blogs would be a better place if people wrote more diaries like this one on both sides of every issue.

I think this diary and the EPI report talk past each other to a limited extent, although understanding that point is important to understanding the limitations of the EPI report.

To explain what I mean, let me take a step back.  Everyone who follows economic trends understands that there has been a problem with real wages in this country for a long time.  Other than a spike a couple years ago that I understand to be inflation-driven and not a sign of progress, real wages either remained flat or grown very slowly, even through the good Bush years when the GOP tried to claim the economy was going great.  If productivity is up and all the big-picture numbers are positive, but workers aren't seeing any of the benefits reflected in their paycheck, that's a serious problem.  I hope we all agree on that.

What the EPI report attempts to prove is that limiting health care benefits will not fix the real wage problem on a macro level.  In other words, the excise tax will not suddenly result in a healthy-looking real wage graph; we are still going to have a problem.  I suspect they are right about this.  Lots of workers don't have health insurance, many others have very limited coverage as things stand, and none of these people will be affected in the short term.  (In the long term, if this legislation actually bends the cost curve, presumably everyone wins.)

But that really doesn't answer whether the excise tax will have effects on a micro level.  The basic question is this: if I have a "Cadillac" plan through my employer, one that will be affected by the excise tax, am I going to see an increase in my wages when my insurance coverage inevitably gets scaled back as a result?  The standard progressive line is that wages will never go up; employers will simply slash health coverage, using the excise tax as an excuse, and pocket the extra money they save.

But the EPI report simply doesn't speak to this issue either way, from what I can see.  And as an employer myself, I find it impossible to buy into the standard progressive argument; not because employers are good-hearted people who want to pay as much as possible, but because compensation is driven by market forces meaning that there's not a lot of fat in current compensation levels for employers to just unilaterally cut.  Yes, if costs go up for my business (fuel costs suddenly double) then the employees will take a hit, there's no doubt about that.  But if the benefits I offer to my employees suddenly get reduced (the insurance company stops offering the plan I used to buy), I'm going to have to give them something to make up for it.  If I could unilaterally cut everyone's compensation without them screaming bloody murder and leaving to work for my competitor, guess what, I'd already be doing it.  Workers definitely have limited bargaining power in a bad economy like this one, but believing that employers can get away with slashing insurance benefits and giving nothing in return is tantamount to claiming that there's no market at all.  I think there is a market, and I think I am currently paying my employees according to what the market will bear, not some overgenerous amount that stems from the goodness of my heart.

Maybe some supporters of the Senate bill have gotten a little too enthusiastic in claiming that health-care costs are the principle driver of this wage problem we've been having.  But I certainly don't think you have to believe that in order to believe that the excise tax will work to cut costs, or that a significant amount of the money that gets cut from employee benefit packages will be returned to those same employees in the form of wages.  It would be great if that outcome were significant enough to fix the wage problem on a macro level, but even if it's not, that wasn't the main reason for the proposal anyway.

by Steve M 2010-01-11 11:12PM | 1 recs
Thank you

For a very thoughtful comment.  The synopsis for my post rose from dueling ideas about whether or not employers who will save money as a result of the excise tax - they will switch to lower priced plans - would pass some of their savings onto their employees - or even if health care costs are enough for such passing on to make any dent.  In other words, the micro-economic context you are talking about.  The EPI study also came from that context also.  That is why I focused on the micro-aspect of it and thought that the report, had the wrong focus, which is the Macro focus.  Since we are talking about a very small amount of plans here, - we're not talking about even all of the insured, let alone the uninsured, I thought that a micro focus was better to focus on that specific issue.

by deaniac83 2010-01-12 12:34AM | 0 recs
a small amount of plans today

not five or ten years from now (assuming the taxable level is not linked to inflation, which it isn't in the Senate bill).

by desmoinesdem 2010-01-12 10:23AM | 0 recs
Actually, it IS linked to inflation

The threshold is indexed to inflation + 1 percentage point.

http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers_Correction_Noted.pdf

by deaniac83 2010-01-12 01:02PM | 0 recs
in this weak employment market

Do you really think employers have to give their employees something in return for slashing their benefits? I know a lot of people earning less than they were a year or two ago. It's not as if they can quit, feeling confident if earning more somewhere else.

by desmoinesdem 2010-01-12 10:22AM | 0 recs
RE: in this weak employment market
Surely the answer depends on location and industry, but generally speaking, just because unemployment is high doesn't mean every worker has suddenly been reduced to the status of a beggar. And remember, we're talking about the class of workers who had enough negotiating power or skills to get high-cost health coverage in the first place. To believe that employers could significantly slash worker compensation with no adverse result, you have to believe that current compensation levels are way in excess of what the market actually will bear. The standard progressive scenario assumes: (1) employers are currently handing out overgenerous compensation packages; (2) if the excise tax passes, those generous employers will suddenly become greedy pigs who take away your health coverage and pocket every dime of the difference; and (3) if the excise tax doesn't pass, they will keep on paying that overgenerous compensation until the end of time. Nothing about this train of thought makes any sense.
by Steve M 2010-01-12 02:28PM | 0 recs
I don't know

Workers definitely have limited bargaining power in a bad economy like this one, but believing that employers can get away with slashing insurance benefits and giving nothing in return is tantamount to claiming that there's no market at all.  I think there is a market, and I think I am currently paying my employees according to what the market will bear, not some overgenerous amount that stems from the goodness of my heart.

While this is undeniable as a matter of basic economic theory, I think it is also heavily dependent on one of the heroic assumptions of capitalism - perfect information - that is particularly flawed when you're talking about health care compensation.  Unlike wages, which are relatively straightforward and easily comparable, health plans are complicated.  Thus it is not easy for a worker to determine if a competitor is offering a better deal.

Put another way, if Steve M's Trucking cuts driver rates from $17 and hour to $13 an hour, the employees can easily determine if they'd be getting a better deal from JJE's Trucking, which pays $15 an hour, by asking one of their buddies who work for JJE's Trucking.  But if Steve M's Trucking changes its plan in a variety of ways, it is much more difficult for the employees to make an apples-to-apples comparison to the package of benefits offered by JJE's Trucking.  Thus there may be more room for an employer to cut benefits, as opposed to wages, without suffering from undesirable attrition as a result.

by JJE 2010-01-12 04:52PM | 0 recs
RE: I don't know

I agree with your point to an extent, but it seems to me that by lessening the amount of the compensation package that gets paid out in benefits as opposed to wages, which is what the excise tax would accomplish, we actually move closer to the mythical world of perfect information.

More to the point, we're postulating a world in which Steve M's trucking is handing out way more in health care benefits than it needs to in order to retain its workforce, but apparently they will never realize it unless the excise tax gets passed.  In other words, perfect information or no perfect information you can't postulate a world in which employers will slash benefits in response to the excise tax and give nothing in return unless you assume our current world contains a whole bunch of employers who are being way more generous than they need to be.

Also, since many of the plans we're talking about are the product of union negotiations, I'm pretty sure the union negotiators have all the relevant facts at their disposal even if the average non-union employee might not.  After all, it's the employer who will have to reopen negotiations if they want to reduce benefits, and they're going to have to come to the table with something pretty specific about what they propose to do.  If a union can't manage to negotiate any kind of compensation to make up for getting your benefits cut severely, then they're not adding a lot of value to the contract you could negotiate yourself without a union, frankly.

by Steve M 2010-01-12 05:10PM | 1 recs

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