Comparing health care costs to median income

I got a look at a benefits statement for a 40-year-old worker at a large Boston-area employer. This worker has a medical and dental plan that covers a family of two adults and one child. The deductibles are low, which makes these costs a good estimate of the total expected cost of health care for this family. Massachusetts already has a universal coverage system almost identical to the one the U.S. will adopt nationwide in 2014, so the cost in Massachusetts today is probably a good guide to what health care will cost nationally.

Here are the numbers: $19,022 for membership in an HMO, which was supposed to be the magic bullet for controlling health care costs in the U.S; $1,781 for dental; total = $20,803.

Let’s compare this to median income in the U.S. The Census Bureau estimates that median household income in 2008 was $52,029, which might include two working parents plus the kid’s lemonade stand revenues. Bureau of Labor Statistics says that the median hourly income in the U.S. was $15.95 in May 2009, which works out to $31,900 for a person working 40 hours per week, 50 weeks per year.

When you consider that local, state, and federal governments need to collect substantial tax revenues from the median worker in order to fund their near-50% share of the U.S. economy, this means that health care for a small family is likely to consume 100 percent of the after-tax income of a typical U.S. worker.

Another way to look at this is that we’ve produced a great health care system for rich people, but we forgot to make most Americans rich!

[The mismatch between income and ability to pay for health care should be widening. Median wages in the U.S. are surely falling, if only because so many Americans now have a wage of $0. Health care and health insurance costs have risen every year in both Massachusetts and nationally. Sources: A 2009 article on health care inflation outpacing salary increases; an article today comparing health costs to reported inflation]

10 Comments

  1. Josh Volchko

    August 25, 2010 @ 3:26 pm

    1

    I completely supported the wonderful idea of health care reform, and tiredly followed the wonderfully absurd ways that they went about making it happen.

    I suppose I should, perhaps, consider myself lucky that I work for an IT company owned by a health insurance company. $15 co-pay at an Urgicare center while I had the flu, 2.98 out of pocket, the visit (doctor, shot, anti-nausea pill) covered by the insurance, all for 17 bucks a month. I don’t mind not spending 200 dollars when I’m not getting sick. Forking over 20,000 dollars, I’d make sure to get a horrible disease at least once a year.

    I think they “conned” some of us healthy people into HSAs, something I understand even less than regular insurance, but is apparently cheaper, premium wise, but I’m probably screwed if I actually got sick or got into an accident.

  2. Matt

    August 25, 2010 @ 5:46 pm

    2

    I have to think that anyone who’s better off with that insurance than going without is probably too close to the brink of death to actually hold down a job.

    It’ll be interesting to see if HSA plans are allowed to survive. They’re certainly a much better deal than spending 20 kilobucks per year to insure the health of three basically healthy people. I mean, if you put $20K/yr into paying for an HSA plan around here, you’d quickly have enough saved to cover your full household deductible out of the account, after which point you could either pile up tax-free savings (to benefit YOU, not the insurance company) or just stick to paying monthly premiums. And any year you didn’t consume a whole annual deductible’s worth of medicine, you could not only celebrate the fact that you aren’t at death’s door, but keep the rest of the money to roll over to the next year.

    What’s not to like? (Unless, of course, you’re a politician who desperately craves the literal power of life and death over your subjects. Then, there’s a lot to dislike.)

  3. Paul

    August 25, 2010 @ 6:15 pm

    3

    Josh:

    You illustrate, in my opinion, what is the largest healthcare problem we have in America. Denial/ignorance. You believe that your trip to the urgent center cost you ~$18. Your cost for insurance may not be the $20k from the example that you say you’d be sure to get your monies worth from, but I bet it’s $8-12k per year. You may not think you’re paying this, because it’s not coming out of your pocket, but it most definitely is costing you. Instead of putting the money in your pocket, and you paying for your healthcare, your employer takes money that could’ve gone into your pocket and pays it for you. The result is you have no idea what the true cost is. It’s all wrapped up into your cost to your employer though. Reduce healthcare costs, and your employer would likely raise your salary by the difference, or put it towards other benefits. Heck, if we got US healthcare costs under control, employers might be able to use the difference to provide more than two weeks vacation as is offered in many other modern countries. Woudn’t that be nice?

    Skyrocketing healthcare costs everyone in America. The way the system is setup now, the folks who enjoy benefits from work tend to be happily ignorant of the true costs–all to the the healthcare Juggernauts advantage and delight. If you’re self employed and insured, you’re not insulated from the harsh reality of the true expense of healthcare.

    I think a vast majority of the “ignorant”/content people would get on board with healthcare reform if employers were forced to itemize the amount they pay for your healthcare on your paycheck as a payment/immediate deduction. Once people know the true cost and “get” that this is money they *could* be taking home, they’d be a little less content with the status-quo. I’m convinced that even the hardcore conservatives would quickly find religion in healthcare reform!

  4. Jackie

    August 26, 2010 @ 9:54 am

    4

    In your example, it is unclear if the $19,020 HMO membership is the entire cost of care (what typically shows up on the benefits statement), or the employee’s own contribution to care.

    It is worth considering that the employee in the example you’ve given probably has a large portion of his HMO subsidized by his employer as a benefit. Let’s assume the entire premium for the 2-adult and 1-child HMO membership is $19,202. His employer pays 70% of the premium, and the employee contributes 30%, which is $5,706.6 pre-tax dollars. Assuming a tax rate of 30%, the employee is contributing an OOP equivalent of $3994 for healthcare for his entire family– only $332 per month in post-tax dollars.

    Now let’s take the value of the health plan, $19,202, and give the employee that money as take-home pay instead, leaving him to get healthcare on his own. Since we don’t know his take home pay, let’s go with the $31,900 median American income (obviously not likely to be this person’s pay). Now we’re talking a $51,102 annual paycheck, a difference of $13,314 post tax dollars assuming a 30% tax rate.

    Divide that out, you get $1,109.50 per month in extra pay that could/should be spent on healthcare. Barely enough for a doctor’s visit if there’s a lab test thrown into the mix. I think your commentator in favor of the HSA are forgetting what the sticker price (or even the discounted group rates that insurers get) on medical care runs these days. What if a family member had a simple medical problem, like allergies? There’s $4k per year, easy, in office visits and inhalers alone.

  5. philg

    August 26, 2010 @ 10:55 am

    5

    Jackie: The $20,803 included both employer and employee contributions. Would the average person be better off with a HSA? It would seem obvious, given that the insurance companies spend a huge amount on administration and then earn a profit on top of that. However, because providers try to charge private patients 5-10X what they’ve negotiated with insurers, I don’t think it would work in the current U.S. economy, especially with the massive tax subsidies given to health insurance. We would have to eliminate most health insurance and return buying power to the average consumer.

  6. ScottS

    August 26, 2010 @ 11:29 am

    6

    “Another way to look at this is that we’ve produced a great health care system for rich people, but we forgot to make most Americans rich!”

    Most Americans not only are not rich, but many are just beginning to realize the depths of our new found poverty. Between nationalizing the healthcare system, the housing industry, and most of our auto manufacturing, the taxpaying American is now virtually a ward of the State as we find ourselves holding the liabilities and risk for three of our largest industries. The business press has recently produced several articles (mostly wrong) on “why businesses are not hiring” yet are sitting on growing cash reserves. Why would businesses hire additional workers, when each one represents a significant tax liability in the form healthcare taxes, high unemployment taxes, and inevitable increases in matching social service taxes. Business do not yet know the extent of the payroll liabilities from our bailout binge, but are choosing to reduce their exposure by not hiring new workers. This will inevitably create sticky long-term high unemployment rates, and much lower consumer spending for many years coupled with low economic growth. The one wealth reserve that most Americans had, the home, has now become a financial death trap. In most areas of the country, purchasing a home today amounts to buying a highly leveraged guaranteed loss, and most Americans are smart enough to realize this.

    Feeling poor and gloomy in VA

  7. Bob Towery

    August 26, 2010 @ 5:10 pm

    7

    There is something diabolical in the health care premium equation that has been planted in most of our heads.

    The idea behind the HSA is that it is a high deductible plan. “Mostly,” it pays nothing until people in the family reach certain deductibles. Unfortunately it’s all clogged up with various levels, treatments, etc. Forget that for a moment. Here’s the gambit, with simple numbers for understanding:

    HSA: Pay the insurance company $6,000 per year, and pay the first $6,000 of medical expenses out of your own pocket.

    Traditional: Pay the insurance company $12,000 per year, and pay tiny copays on the services provided.

    In the first case, you are making a bet that some years you won’t have $6k of expense, thus you pocket the difference. In the second case, you are guaranteed to spent $12k even if you don’t use one penny of services.

    You just would not believe how hard it is to make people understand this. I have a friend, business man, graduate of a prestigious college, successful in everything he does (including piloting, Phil, complex twins/IFR), multi-millionaire. He was paying $19k a year for a cadillac plan and just could not come to grips out the HSA concept (which I have used for six years).

    The whole thing twisted him so badly that he turned it over to his accountant, who analyzed all factors, recommended the HSA, and billed him $3,700.

    I now have $25k built up in my HSA account, each of those dollars was a tax deduction, they are growing tax free (well, not much currently) and when I use them later in life the growth is non-taxable.

    What is so hard to understand?

  8. Josh Volchko

    August 27, 2010 @ 11:08 am

    8

    Bob, that’s easily the best description I’ve heard discussing the difference between the two.

    I don’t buy the super-hidden benefits theory, since I have great benefits outside of this (I could take off the entire month of September if I wanted), and I’m not entirely certain of my employer’s benevolence, otherwise.

    I doubt I’m entirely ignorant of the true costs since the first thing I said was that I was completely on board with reform, and was in agony when it turned out they weren’t reforming anything to help those people who see that $20,000 they *could* have go down to a far more reasonable price, or noticing the behind-the-scenes benefits come out thru pay raises/vacation time/etc.

    But I don’t get how HSAs, with the exception of them being tax-deductible, is any different from me just keeping the money in the first place. I also don’t see how they’d help reduce costs. If I don’t absolutely need an MRI, or some such procedure, it’ll probably help me from getting extraneous procedures, but how would this reduce the cost of such a procedure. Maybe this is partially the point, I suppose. I’m not saying HSAs are bad, and they seem to have potential the more I read, but I’m still at a lose at how they’ll control the cost of any individual visit/procedure/etc.

  9. Bob Towery

    August 27, 2010 @ 12:31 pm

    9

    Josh:

    Re: HSA’s. Until you hit your deductible, the money you spend on medical care is truly out of your pocket. So if a Dr says you need an MRI, you find yourself asking “how much will that cost?” (which people with rich plans never seem to do).

    For example, a Dr wanted to do an MRI on my shoulder. This will cost thousands. I said “how about an xray, will that work?” Sure he said.

    We have also not spent thousands on prescriptions. I had an ulcer. The med my Dr prescribed was about $450 for the one month I had to take it. I said no. Her office then gave me three choices, which I priced, which was something like $80, $150 and $250. She said they were probably all about the same in terms of efficacy. So I said give me a scrip for the $80. Her office then called back and said the rep for the $450 drug was giving it to her/me at NC.

    This isn’t to say of course that you are not going to treat yourself appropriately. If I really need the $450 med or the MRI I can afford it. But you see what I mean…

    The HSA does not help the cost of a procedure though, you are correct on that. But, you do get the negotiated rate, which is a huge improvement over having no insurance at all and really being a cash customer.

    If you ask me, one of the biggest issues in our complex medical world is “friction.” Think about how many hundreds of thousands of highly paid people it takes to process all the claims. Every Dr has a person dedicated to it. The hospitals have tons. Then you have the insurance companies, with all their people trying to not pay the claims! I wouldn’t be surprised if the friction in this endeavor does sucks up 30% of the dollars. Maybe Phil could look into that for us.

  10. Matt

    August 30, 2010 @ 2:33 pm

    10

    “HSA: Pay the insurance company $6,000 per year, and pay the first $6,000 of medical expenses out of your own pocket.

    Traditional: Pay the insurance company $12,000 per year, and pay tiny copays on the services provided.”

    No, it’s really more like

    HSA: Pay the insurance company $4000 per year, and pay the first $7500 of medical expenses out of a special savings account that you fund with pre-tax dollars. Any money in the fund that doesn’t get spent this year stays in for next year, and if you use more than $7500 of medical services in a year (which you won’t, if you’re at all healthy), the insurance company pays for everything, no questions asked.

    Traditional: Pay the insurance company $20,000 per year. If you don’t get sick, you just gave up $20K and got nothing for it. If you do get sick, the insurance company finds a loophole in your coverage than enables them to refuse to pay until you spend years fighting them in court, and probably lose. And if you’ve ever been sick before, or you lose your job, even this deal isn’t available to you.

    The only reason “traditional” “health” “insurance” ever got invented is that the government gave it a loophole in the WW2-era wage and price controls. Those don’t exist anymore, of course, but it still gets VERY favorable tax treatment when it’s provided by a big company to its employees. But it’s a lousy deal.

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