This is how health care costs are stealing your raises

A professor at USC says increasing health care costs for employers are eating up raises for employees.
A professor at USC says increasing health care costs for employers are eating up raises for employees. Dreamstime/TNS

Stagnant wage growth is one of the most pressing problems facing American workers. Rising health care costs is one of the biggest reasons, and undoubtedly one of the most overlooked.

How do rising health costs reduce wages? Most full-time workers are paid a combination of wages and benefits. If the cost of benefits goes up, employers have less to pay wages – and the cost of health benefits to employers has been increasing rapidly for many years.

That is exactly what has been happening to California workers, and it will only get worse – much worse and very soon.


The California Health Care Foundation reports that between 2011 and 2016, the yearly cost of health insurance for a family grew by $5,208 (36 percent) while median wages increased by only $3,037 (8 percent).

Imagine that health insurance costs did not grow during this period, and that those savings were passed on to workers in the form of higher wages. Employees’ income would have risen closer to $8,245.

The total cost of health insurance for a family in California is now more than $20,000 a year. If it grows by 6 percent annually, as it has done recently, health insurance costs will grow by $9,000 over the next six years. This will leave very little room for increasing wages and will eventually result in wage cuts for millions of California workers. Employers will also be reluctant to hire new workers, resulting in slower job growth.

What should we do? First, we should not wait for help from Washington, D.C. Policy intervention is needed at the state level, and it can work.

Believe it or not, there was a time when health insurance costs in California grew slowly. It was a time when doctors and hospitals had to compete with each other based on price to secure contracts with health insurance plans. While this allowed health plans to control cost increases, it also led to consolidation, including the formation of large multi-hospital systems. Health care markets in California have become highly concentrated, allowing many hospital and doctor groups to join together to set their own, higher prices that insurers must accept and pass along in higher premiums.

California legislators need to move quickly to restore the competitive balance in our health care system. Here is what they can do:

▪ Limit “all-or-none” contracting by health care systems, which forces health plans to contract with all members of the systems (including hospitals and physician groups), even when lower priced and higher quality alternatives are available.

▪ Restrict the amounts that hospitals can charge insurers when patients go to out-of-network emergency services (currently there is no limit).

▪ Prohibit hospitals from demanding other contract clauses that hinder competition, such as preventing health plans from offering incentives to consumers to use lower-priced competitors.

▪ Reform antitrust regulations to allow for more efficient delivery systems, but keep markets competitive to ensure that savings are passed on to consumers.

These changes would immediately save Californians billions in health care costs. Without such actions, families will watch wage gains that are rightfully theirs disappear into the coffers of doctors and hospitals.

Glenn Melnick is professor of health care finance at the Price School of Public Policy at the University of Southern California. He can be contacted at