COST: The Employer Burden--An Introduction

You might have heard this rumor, that the rising cost of health care threatens the competiveness of our economy and the stability of middle-class jobs. Ask GM which says it spends more on health care than it does on steel for each car it makes. Ask Wal-Mart or SEIU. Ask the owner of a small firm or the CEO of Safeway. They'll tell you this rumor is more than rhetoric; it's a reality seen in bottom lines and headlines across this country.

Of course, ask an economist, and they'll tell probably tell you that workers, not businesses, ultimately pay for increasing health costs through lower wages. And for an economist looking at the last 40 years, the data seems to match the theory. But most CEOs don't have tenure. They've got to make their boards happy with the next quarter's numbers, and not four decades of compensation data.

Which is why this week, we'd like to highlight the recent work of our colleagues, Len Nichols, Ph.D., and Sarah Axeen. Their study provides a complete understanding of employer health costs in a global economy (For the issue brief click here. For Dr. Nichols slides, click here). Today, we'd like to lay out some of the economic underpinnings of their argument.

• If health care costs don't affect profits, why are employers dropping coverage and reducing benefits? Our current tax system creates an incentive for employer-sponsored insurance. Yet, from 2000 to 2007 the proportion of employers offering health insurance has dropped from 69 to 60 percent, while average employee premium contribution has risen from $130 to $273. This anecdotal evidence is backed up with economic data showing that:
• The cost of health care is not fully shifted into wages, especially in the short-run. The reasons are complex and more fully explained in the policy paper, but essentially it comes down to two points: wages are sticky, and the increases in health care costs are unpredictable from year to year. From 1960 to 2006, in no decade, did the changes in employee wages ever match the changes in benefits. Thus,even in the mid- to long-run, firms are unable to completely shift the costs of health care back into wages.

In the short term, employers are clearly forced to bear a burden of health care costs. Next, we'll examine just how big that burden is for American businesses.