Yesterday, we examined the recent work by Len Nichols, Ph.D. and Sarah Axeen of New America Foundation illustrating why employers bear a share of rising health care costs. Before examining the effects of this burden on real businesses and the American economy, it's helpful to see how the employer burden operates at the level of a single hypothetical firm, say NAF Inc.

NAF Inc. is a manufacturer specializing in nickel-plated axes. NAF Inc. pays its blacksmith $35,000 a year in total compensation that (for simplicity) is divided into $25,000 in wages and $10,000 for a family health insurance plan. Let's say overall inflation is 2.5 percent and premium inflation is 10 percent (convenient but reasonable estimates). To continue offering insurance while increasing total compensation at the rate of overall inflation, NAF Inc. would actually have to cut wages by $125 which is not feasible in the short run (especially when dealing with blacksmiths).

Moving from the back of the envelope to the real world, today, we'd like to highlight the magnitude of the burden of health care costs on employers and its effect on the competitiveness of American businesses:

• The cost of health care is taking up an increasingly large percentage of firms' payrolls. In 2006, American firms spent $459 billion on health insurance, providing insurance to close to 60 percent of Americans. In 1960 health benefits were only 1.2 percent of wages and salaries. Last year, the employer cost of health benefits was about 9.9 percent of payroll, and this number is actually an understatement. For the employees that actually take-up health insurance they cost 18.3 percent of payroll.
• Businesses in our global economy can't pass higher health care costs onto consumers in the form of higher prices. Globalization has made markets even more competitive. If health care costs can't come out of wages, and they can't be translated into higher prices, they must come out of lower profits.
• Industries with both high health care costs and high trade exposure bear an especially heavy burden. Manufacturing is a prime example in the U.S. of an industry with both high health care costs and a large exposure to foreign trade and imports. American manufacturers spend $2.38 per hour per worker on health benefits—more than twice the average for manufacturers in similar advanced industrial economies.

American business can no longer afford the current system of employer-sponsored health insurance. Tomorrow, we'll look at some possible policy solutions available to help ease the employer burden and make health care more sustainable.