I have recently been receiving some comments suggesting that one way to cut health care costs would be to reduce CEO pay. Would cutting CEO pay be beneficial to society?
Ideologically, I believe that markets—and not the government—should determine wages of all workers. If the U.S. government were to put a cap on CEO pay, there would likely be a ‘brain drain.’ Top-tier managers would leave the U.S. for other OECD countries where salaries were not capped in order to maximize their annual salary. Further, if only selective industries were to have caps on CEO pay, how would the government decide which industries’ CEOs need to have their pay regulated? Would lobbyists be able to bribe politicians in order to keep an industry off the CEO cap list?
Some people argue that health care is unique and merits special consideration. The argument for special consideration is usually based on the fact that health care is a ‘need’ good or that since the government is financing much of healthcare spending in the U.S., CEOs should not be profiting off John Q. Public.
Despite my general aversion to government regulation of salaries, I decided to do some calculations to see how limiting CEO pay would affect healthcare costs. Healthcare Economist reported on UnitedHealth Group CEO William McGuire’s $125 million worth of compensation in 2005 (and his subsequent stepping down from the position). This figure should be seen as the right tail of the health insurance CEO compensation distribution. If the U.S. government was to limit health plan CEO salaries to $5 million dollars and if the health insurance company decided to pass the savings on to consumers (rather than investors), this would result in approximately a $120 million savings to consumers. On its website, UnitedHealth Group states that it “serves more than 50 million Americans.” Thus the amount of cost savings per person enrolled in UnitedHealth Group would be less than $3.
With this over-simplified analysis, I conclude that CEO compensation is not the main driver of costs in the health care sector and regulating CEO pay—while likely cathartic for those fed up with high health care costs—will not make medical care services any less expensive for the average consumer.
I’ve been thinking about too, and thank you for putting the numbers out there for analysis. However, I think that there’s an assumption in your calculation that, if considered differently, may lead you to a different conclusion. Within a large group of people who need health care and health insurance, a small portion of them have a disproportionately large portion of the costs (those that need chemotherapy, surgery, expensive medication, etc.). If that 120 million dollars went to a smaller percentage of the 50 million people, there would be a quite a few more claims covered.
Also, the health insurance compainies tend to not reinvest in the healthcare industry. If the 120 million dollars provided, for example, incentives for private practices to use health information technology (and insurance companies actually used it themselves to help physicians and patients track claims just like we can track USPS packages), insurance companies would cut on administrative costs and maybe even save on ‘medical losses’.
As for the potential ‘brain drain’, maybe the healthcare system would look a little different if the insurance companies attracted CEOs who cared more about healthcare then about gettting a $125 million compensation.