Employer Burden

Reveille may be the bugle call that gets our military up in the morning; but all it takes is a few good state legislators to get us humming a tune about employer-provided health benefits in the wee hours of the morning. That was our song last Friday at 8:00 am Central Time, when we welcomed an impressive crowd at the National Conference of State Legislatures 2008 Legislative Summit in New Orleans. It is amazing how regular people will nod along to a health economics lecture even in New Orleans if you just set it to the right tune.

We explained how American firms' share of health care costs are contributing to their competitive disadvantage in the global marketplace. Like our paper on the same subject outlines, U.S. employers contribute more than twice as much as our top trading partners and are unable, in the short run, to shift costs onto workers or into prices. Accordingly, more employers are being forced to drop health coverage altogether and business support for comprehensive health reform is growing.

Kansas City, Missouri—hometown to winners of not one, but two seasons of Survivor, as well as the most recent season of American Idol—lost its bid on Sunday to land a $375 million Bombardier aircraft plant, which will instead be located closer to the Canadian company's headquarters in Montreal.

Why did the Paris of the Plains lose out to its Quebecois competitor? Globalization brings many variables into play, but Senator Claire McCaskill (D-MO) says it was health care that tipped the scale, according to the Kansas City Star's Jason Noble.

She's got a point. According to a recent policy paper by our New America colleagues Len Nichols and Sarah Axeen, U.S. manufacturing firms pay nearly three times as much per hour in health benefits as their Canadian competitors.

I am guilty of going to work when I'm sick. I admit to workaholic tendencies, but the real reason that I choose to cough my way through a day is because, as a working mother, most of my lost work days are due to my kids' illnesses and doctor appointments. Many of us hard-working, competitive Americans have our reasons for this practice of showing up to work sick. We load up on OTC medicine and suffer our way through a contagious illness, while sharing our germs with our not-so-grateful co-workers. When we get really sick, though, some of us don't have the luxury of staying home. It would mean unpaid leave or cutting into scant, precious vacation days.

This is troublesome for our already problematic health care system. When illness goes untreated, it can lead to more serious conditions that require higher-priced services and drug treatments. Increased health care costs ripple through the system:

Health care is the Kevin Bacon of economic maladies. Name a problem facing the U.S. economy and, without too much effort, you can find a way link to the wealth of nations back to the health of nations. New York Times columnist Paul Krugman zeroes in on this connection in his column today, discussing the close link between health care, jobs, and the economy. He argues:

Most public discussion of health care focuses on the problems of the uninsured and underinsured. But insurance premiums are also a major business expense: auto makers famously spend more on health care than they do on steel. One of the underemphasized keys to the Clinton boom, I’d argue, was the way the cost disease of health care went into remission between 1993 and 2000. ... But premiums surged again after 2000, imposing huge new burdens on business. It's a good bet that this played an important role in weak job creation.

In the past the two days we've examined recent work by Len Nichols and Sarah Axeen of the New America Foundation demonstrating the burden of health care costs on employers and their effects on the global competitiveness of American firms. We've seen that the current system is unsustainable—both for our employers and our nation. Today, we'd like to focus on some of the possible solutions presented in their paper and elsewhere.

The paper outlines one possible option of "cashing out" the employer contribution to health care and converting their premium payments into wages. The details of this transition would have to be carefully managed and accompanied with significant insurance market reforms (such as guaranteed issue and community rating) that would protect consumers and keep coverage affordable. They are outlined more clearly in the New America Foundation's A Sustainable Health System for All Americans.

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:

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.