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Financing health care costs - who pays?

Throughout the 1980s, health care costs grew at astounding rates. Despite economic predictions of an imminent recession, health care costs in the 1990s are predicted to continue to increase at rates that exceed those of the previous decade. Employer-provided, private health insurance coverage remains the major vehicle that opens the door of access to these costly services. While many suggest that in the 1990s the United States will be ready for national health insurance (employers, health practitioners, and policy makers have each developed proposals), there are major efforts to preserve the private sector financing role of employers.



National health care expenditures in 1988 totaled $539.9 billion or 11.1% of the Gross National Product (GNP). Since 1965, the annual growth rate of national health care expenditures has exceeded that of the GNP. Changes in the business cycle are only moderately reflected in the growth rates of health care expenditures. (See Figure 1 on page 13). Thus, it is not surprising to find that health care expenditures have continuously consumed an increasing share of the nation's resources: 5.9% of GNP in 1965; 8.3% of GNP in 1975; and 10.5% of GNP in 1985.

Who has financed these expenditures, particularly personal health care? In 1960, patients directly financed the majority of personal health-care expenditures via out-of-pocket payments, representing about 56% of expenditures. By 1988, patients'out-of-pocket shares had fallen to 23.7%. Private health insurers (predominantly employer-sponsored) have increased their shares of the expenditure burden from 21% in 1960 to 32.4% in 1988.

The federal government and state and local governments have adjusted their respective shares from 8.9% to 29.9% and 12.5% to 10.6%. Over the period, private health insurers have maintained a constant share 35%) of expenditures on hospital services, increased their share of expenditures on physician services (32% to 47.6%), provided negligible financing of nursing home care, and increased their share of expenditures on dental, home health, vision, and drug items (8% to 19.2%).

By the year 2000, per capita health care expenditures are predicted to increase to $5,515, a 443% increase above expenditures in 1980. Employers and employees will face a 529% increase in dollars allocated to health care, an increase from $66 billion in 1980 to $412 billion in 2000. States will face a 480% increase in Medicaid expenditures during this same period.

In Tennessee, per capita health expenditures in 1980 were $952. By 1990, these expenditures were predicted to rise to $2,262. By the end of the century, expenditures will rise to $5,145, or an amount slightly lower than the national average. These predicted expenditures for the year 2000 reflect a 441% increase between 1980 and 2000.



The impending crisis of rising and exorbitant health care costs has forced employers to face a no-win dilemma. On the one hand, workers are unwilling to relinquish their lucrative fringe benefit: health insurance coverage. Additionally, employers know that adequate access to medical services produces healthy, happy, and productive workers. On the other hand, employers compare their rising costs of health insurance coverage to costs of international competitors and view rising health costs as the achilles heal.

According to recent data analysis by the Department of Labor's Bureau of Labor Statistics and the Bureau of National Affairs, disputes over health insurance were responsible for 60% of worker strikes and 78% of work stoppages in 1989.'Me established tradition dictates that health insurance coverage is a viable substitute for increased wages at labor-management bargaining tables.

Recently, employers have reduced their share of the burden of rising health care costs by increasing the share of costs borne by the employee (increased premium payments, deductibles, and co-insurance). Workers have found that their out-of-pocket costs of medical care have increased at higher rates than their wage earnings. For example, among unionized workers, average annual wages increased by 3% between 1986 and 1989. However, annual premium payments increased by 12% and deductibles increased by 6.5%. The rates of increase are even higher for the nonunionized employee sector.

Whether viewed from the perspective of overall rates of increase, as a percentage of business expenses and corporate operating profits, or as the price markup in the sale of a final product, U.S. employers perceive health care as a significant, uncontrollable cost. Annual employer medical costs increased by 18.6% in 1988 and by 20.4% in 1989.

Ford Motor Company reports that employee medical benefits were 6% of payroll expenses in 1970 and 15.8% in 1989. These medical benefits were about 50% of Ford's pre-tax corporate operating profits in 1988. National statistics indicate that health care benefits account for 25% of the net profit of U.S. corporations. A $350 price markup was necessary in 1989 for Ford to cover the cost of its employees'medical expenses. Me Chrysler Corporation indicates its markups were $300 to $500 per car due to these expenses. Ford executives suggest that expenditures for medical care threaten its company's long-run growth because it drains resources that could be used for research, product development, and employee education/training.

American business, led by the AFL-CIO, have aligned in support of a coordinated national health care system, similar to the Canadian system. They realize that the U.S. is the only industrialized nation (with the exception of South Africa) that does not have a national health care system.



Uwe Reinhart (James Madison Professor of Political Economy, Princeton University) has led a national debate about health care spending and American competitiveness. Counter to views of leading employers, Reinhart and his supporters suggest that American companies are not at risk of losing their market sales due to the employers' shares of rising health care costs. Rather, they suggest that the problems of U.S. companies are low productivity and high overhead.

Reinhart and others suggest that reorganizing the U.S. health care system to replicate the Canadian system would lead to long-term, negative effects on the competitiveness of U.S. companies. That is, if a high percentage of health costs are financed by the government sector, then the government will also have to adjust its financing priorities. National education, health care, and other human service programs would compete for scarce dollars. Since it is thought that the advocacy groups supporting publicly-financed health care have more political clout than other groups, health care advocates are as perceived likely to win the budget allocation battle. Thus, long-term and direct impacts on the nation's competitiveness could occur by blindly converting to a national health care system.

Reinhart and associates say that U.S. companies should return to labor-management bargaining tables with suggestions that workers assess the value" placed on individual components of their health insurance policies. Employers should offer insurance options that provide employees with financial rewards for choosing cost-effective health policies. Moreover, Reinhart and associates suggest that employers should support government intervention in the form of employee taxes on employer provided health insurance. A similar tax on health insurance as the one on wages would enable employees to assess the relative value of the two "benefits" of employment.

Data analysis of the Employee Benefit Research Institute is also consistent with this alternative perspective of a weak link between international competitiveness and health care spending in the U.S. Overall employee benefits were compared to average hourly compensation costs for several countries. Benefits as a percentage of hourly compensation were 43%,41%,45%,22%,27%, 47%, 41%, 25%, and 26% for Germany, Sweden, the Netherlands, Canada, the U.S., France, japan, Australia, and the United Kingdom, respectively. Thus, when compared with a major international competitor, Japan, the U.S.'s benefit/ compensation rates are lower.

Proponents of the Reinhart viewpoint suggest that we need a two-tiered health care system. The system would maintain employer provided policies (with effective private sector cost control incentives) and have a publicly-financed system that is available for all who are not privately insured.


Senator Edward Kennedy has proposed a federal health policy passed by the Senate Labor and Human Resource Committee), mandating employer health insurance. The proposed policy addresses the concern that 35 million United States citizens do not have health insurance and face inadequate access to health care services. Among this group of uninsured, 20.2 million are full or part-time employees. Senator Kennedy's mandated health policy would require all employers to

* provide a minimum level of medical and mental health benefits to all employees who work at least 17.5 hours per week,

* provide coverage to the families of these workers, contribute toward the an amount ranging from 80-100%, depending upon the wage earnings of the worker, and

* provide an insurance policy that has a maximum co-insurance of 20% and a maximum deductible of $250 (or 500 for a family).

Moreover, Kennedy challenges the business sector to develop a better proposal or buckle down to the mandates of the above policy.

The above policy would increase significantly the labor costs of many employers, particularly those who do not currently offer health insurance policies and have 25 employees or less. Many employers may lay off or close their businesses as a result of the proposed changes. Mandated employer health insurance will significantly affect several industries, including wholesale and retail trade, construction, agriculture, and mining. As a result, the Southern states are a prime target for major business sector turnover. According to a study by the Partnership on Health Care and Employment, the state with the highest risk of newly unemployed labor is New Mexico; 11.1% of employed workers are predicted to face layoffs or unemployment. California, Texas, Oklahoma, Louisiana, and Florida are predicted to loose 9.1% to 11.1% of their workforce. Tennessee, Kentucky, Arkansas, Mississippi, and Alabama are among the states with a predicted increase in unemployed labor of 7.1% to 9%.


The health care financing options of American companies warrant immediate attention. For the first time in U.S. history, the economic survival of U.S. firms hinges on coordinated planning efforts by all sectors regarding health care financing.
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Title Annotation:impending crisis of rising and exorbitant health care costs
Author:White-Means, Shelley I.
Publication:Business Perspectives
Date:Dec 22, 1990
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