Employer Burden

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.

Determined to have a constructive voice in the growing national dialogue on health reform, the National Federation of Independent Business (NFIB), the nation's largest small business association, launched its new health care campaign—Solutions Start Here: When Healthcare is Fixed for Small Business its Fixed for America.

The most impressive message of the day came from Todd Stottlemyer, President and CEO of NFIB. After recalling NFIB's active opposition to the Clinton health care plan (and its employer mandate), Stottlemyer said, "In 1994 it was good enough to say no...today's situation must be different," and went on to emphasize the importance of a "diverse bipartisan conversation."