Productivity Rewards and Pay Illusions with Benefit Cost Increases

Productivity Rewards and Pay Illusions with Benefit Cost Increases Sylvester J. Schieber, Ph.D. 11th Annual RRC Conference Issues for Retirement Security 10 August 2009 Washington, 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

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

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

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

Growth in Hourly Productivity and Compensation Elements 1995-2007 Value of productivity and compensation elements set to 100 in 1995 Source: Derived from unpublished data from the Office of the Actuary, Social Security Administration.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 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 Pay levels are in deciles Source: Watson Wyatt Worldwide tabulations of the Current Population Survey, various years.

Compound Annual Growth Rates in Inflation-Adjusted Social Insurance Contributions for Full-Time Workers Pay levels are in deciles Source: Watson Wyatt Worldwide tabulations of the Current Population Survey, various years.

Compound Annual Growth Rates in Inflation-Adjusted Retirement Benefits for Full-Time Workers Pay levels are in deciles Source: Watson Wyatt Worldwide tabulations of the Current Population Survey, various years.

Compound Annual Growth Rates in Inflation-Adjusted Health Benefits for Full-Time Workers Pay levels are in deciles Source: Watson Wyatt Worldwide tabulations of the Current Population Survey, various years.

Share of Compensation Gains Provided as Benefits for Selected Periods Source: Steven A. Nyce and Sylvester J. Schieber, “Productivity Rewards, Pay Illusions Caused by Retirement and Health Benefit Cost Increases,” Watson Wyatt, August 2009.

Intermediate Term Outlook on Benefit Costs

Social Security and Medicare HI Income and Costs as a Percentage of Covered Payroll Percent of covered earnings Source: Office of the Actuary, Social Security Administration.

Average Funded Status and Contributions to DB Plans for 2000 to 2006 and projected for 2007 to 2010 Contributions (billions $) Percent funded 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 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…

Actual Wage Growth, Expected and Actual Hospital Cost Growth under HI 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 Hospitalization days per enrollee Source: See Nyce and Schieber, p. 39.

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

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

Baseline Projections of Annual Wage Growth Rates across Earnings Deciles for Selected Periods Source: Steven A. Nyce and Sylvester J. Schieber, “Productivity Rewards, Pay Illusions Caused by Retirement and Health Benefit Cost Increases,” Watson Wyatt, August 2009.

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

Annual Compound Average Wage Growth until 2015 Source: Steven A. Nyce and Sylvester J. Schieber, “Productivity Rewards, Pay Illusions Caused by Retirement and Health Benefit Cost Increases,” Watson Wyatt, August 2009.

Annual Compound Average Wage Growth from 2015 through 2030 Source: Steven A. Nyce and Sylvester J. Schieber, “Productivity Rewards, Pay Illusions Caused by Retirement and Health Benefit Cost Increases,” Watson Wyatt, August 2009.

Scenarios • Baseline assumptions: health costs grow at rate of growth in wages plus 1.5 percent per year • Scenario 1: Assume that workers not covered by health insurance are mandated to be covered • Scenario 2: Coverage is expanded and recent health inflation rates persist

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 • Scenario 2: Coverage is expanded and recent health inflation rates persist • Scenario 3: Coverage is expanded and health inflation rate increases to compensation growth rate plus 6 percent per year

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

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

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

Advisory Board Project • 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

Advisory Board Project • 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

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

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

The 2008 C-Section Rates in Miami

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

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

Dr. Brent James of Intermountain Health System “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.”

Productivity Rewards and Pay Illusions with Benefit Cost Increases