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
–
–
–
1
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
2
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?
–
–
3
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
4
Stagnation in Income Growth in Middle
Classes in Early Part of the Decade
5

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
–
–
–
6
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
150.0
125.0
Wage
Pen/Health
100.0
ER Soc Ins
Productivity
75.0
1995
7
1997
1999
2001
2003
2005
2007
Source: Derived from unpublished data from the Office of the Actuary, Social Security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 InflationAdjusted Hourly Compensation for Full-Time FullYear Workers
Pay levels are in deciles
8
Source: Watson Wyatt Worldwide tabulations of the Current Population Survey,
various years.
Compound Annual Growth Rates in InflationAdjusted Hourly Pay for Full-Time Full-Year Workers
Pay levels are in deciles
9
Source: Watson Wyatt Worldwide tabulations of the Current Population Survey, various
years.
Compound Annual Growth Rates in InflationAdjusted Social Insurance Contributions for FullTime Workers
5.0%
4.0%
3.0%
1980-1990
1990-2000
2.0%
2000-2007
1.0%
0.0%
1
2
3
4
5
6
7
8
9
10
Pay levels are in deciles
10
Source: Watson Wyatt Worldwide tabulations of the Current Population Survey,
various years.
Compound Annual Growth Rates in InflationAdjusted Retirement Benefits for Full-Time
Workers
Pay levels are in deciles
11
Source: Watson Wyatt Worldwide tabulations of the Current Population Survey,
various years.
Compound Annual Growth Rates in InflationAdjusted Health Benefits for Full-Time Workers
Pay levels are in deciles
12
Source: Watson Wyatt Worldwide tabulations of the Current Population Survey, various
years.
Share of Compensation Gains Provided as
Benefits for Selected Periods
Earnings
decile
1
2
3
4
5
6
7
8
9
10
13
1980-1990 1990-2000 2000-2007
100.0%
100.0%
87.0%
52.7%
61.8%
41.7%
46.9%
35.5%
29.0%
20.8%
29.5%
22.2%
24.2%
20.5%
17.2%
18.3%
12.1%
9.5%
7.8%
6.9%
29.1%
44.6%
48.9%
59.6%
53.6%
54.5%
50.2%
49.7%
43.8%
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
Earnings
decile
14
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%
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
15
Social Security and Medicare HI Income and
Costs as a Percentage of Covered Payroll
Percent of covered earnings
16
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
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
2000
17
2002
2004
2006
2008*
2010*
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
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
1980
18
1985
1990
1995
2000
2005
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?
–
–
–

The Medicare experience
–
–
–
19
Productivity improvements in the delivery sector
Added contributions for those not now covered
Reengineering of the health delivery sector
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
20
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
21
Source: See Nyce and Schieber, p. 39.
Completing the Trifecta: Unexpected
Inflation, Unanticipated Utilization… and
then Expanded Coverage
22

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
23
Baseline Assumptions
24

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
25
Income Deciles
2007 to
2015
2015 to
2030
2007 to
2030
All
0.88%
1.10%
1.02%
1
2
3
4
5
6
7
8
9
10
0.99%
0.94%
0.89%
0.85%
0.84%
0.84%
0.84%
0.84%
0.86%
0.91%
1.01%
1.01%
1.00%
1.00%
1.02%
1.05%
1.07%
1.09%
1.12%
1.17%
1.00%
0.98%
0.96%
0.95%
0.96%
0.97%
0.99%
1.00%
1.03%
1.08%
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
26

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
Health inflation Expanded
All
rate above coverage workers
wage growth
Third
decile
Median
decile
Eighth
decile
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%
Source: Steven A. Nyce and Sylvester J. Schieber, “Productivity Rewards, Pay Illusions
Caused by Retirement and Health Benefit Cost Increases,” Watson Wyatt, August 2009.
27
Annual Compound Average Wage
Growth from 2015 through 2030
Health inflation Expanded
All
rate above coverage workers
wage growth
28
Third
decile
Median
decile
Eighth
decile
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%
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
29

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
Annual Compound Average Wage
Growth until 2015
Health inflation Expanded
All
rate above coverage workers
wage growth
30
Third
decile
Median
decile
Eighth
decile
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%
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
Health inflation Expanded
All
rate above coverage workers
wage growth
31
Third
decile
Median
decile
Eighth
decile
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%
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
32

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
Annual Compound Average Wage Growth
until 2015
Health inflation Expanded
All
rate above coverage workers
wage growth
33
Third
decile
Median
decile
Eighth
decile
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%
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
Health inflation Expanded
All
rate above coverage workers
wage growth
34
Third
decile
Median
decile
Eighth
decile
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%
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
35

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
Annual Compound Average Wage Growth
until 2015
Health inflation Expanded
All
rate above coverage workers
wage growth
36
Third
decile
Median
decile
Eighth
decile
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%
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
Health inflation Expanded
All
rate above coverage workers
wage growth
37
Third
decile
Median
decile
Eighth
decile
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%
Source: Steven A. Nyce and Sylvester J. Schieber, “Productivity Rewards, Pay Illusions
Caused by Retirement and Health Benefit Cost Increases,” Watson Wyatt, August 2009.
Getting the Horse in
Front of the Cart
38
Advisory Board Project

Meeting with Dr. John Wennberg on the
Dartmouth Atlas Projec t
–
–
–
39
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
–
–
–
40
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
–
–
–
41
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
–
–
–

Dr. Brent James, Health Care Delivery Institute
at the Intermountain Health Care System in
Utah
–
42
Effective care
Preference sensitive care
Supply-sensitive care
–
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
–
–
–

43
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
44
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
–
–

Rates
–
45
C-sections cost between $11,000 and $30,000
per live birth
Normal deliveries cost between $5,000 and
$16,000
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
Miami-Dade
County
46
Total
C-sections births
Percentage
c-sections
Kendall Regional
Hialeah
South Miami
Baptist
Mercy
Mount Sinai
North Shore
Palmetto General
Homstead
Jackson Memorial
Jackson North
1,534
871
2,483
2,221
803
944
847
959
758
2,786
626
2,180
1,657
4,145
4,416
1,384
1,944
2,016
2,005
1,522
5,524
1,704
70.4%
52.6%
59.9%
50.3%
58.0%
48.6%
42.0%
47.8%
49.8%
50.4%
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




47
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





48
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.”
49
Conclusions
50
Conclusion
51

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
Outlook for the Future
52

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
Questions and Answers
?
?
?
?
?
?
?
?
53
?
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