More Pressure Than Being Sued

March 27, 2007
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Since 1998, health care spending has risen faster than the growth rate of the gross domestic product, inflation and the population.

That triple-threat economic fact was part of a report on health-related spending that was released early this year by the Henry J. Kaiser Family Foundation.

In 2003, the most recent reporting year, the country spent almost $1.7 trillion on health matters, a figure that works out to be $5,670 per person and the highest of any industrialized nation (Canada spent $2,998).

The nation’s health expenditures that year claimed 15.3 percent of the GDP. Those outlays were 10 percent of the GDP in 1985, and just 5 percent in 1960. And the steep climb is expected to continue.

Spending on health care has been projected to double by 2013 when it will reach a total of $3.4 trillion and become 18.4 percent of the GDP — meaning that almost one of every five dollars spent in the U.S. that year will go to some segment of the health industry.

That projection should be of concern to employers because the private sector would pick up more than half of that expenditure, at the current spending level. In 2003, businesses spent nearly $331 billion on insurance plans for workers, or $3.80 for each hour a covered employee worked. That figure alone accounted for 36 percent of all health spending.

A 2004 survey of company CEOs conducted by the Business Roundtable found that the growing cost of health care was putting the most cost pressure on their operations, twice as much as potential litigation, their next concern. Forty-three percent of the CEOs reported health spending was their greatest cost pressure, compared to 20 percent who said being sued was.

And the cost pressure to provide employees with coverage is heavier for companies that compete internationally, like Michigan’s automakers, than those that compete regionally.

“Some of the problems that we’re seeing with the Big Three are clearly associated with health care costs. The fact that in the next five years Ontario will be the new production center for North America is clearly a result, in my view, of the health care system,” said George Erickcek, senior regional analyst with the W.E. Upjohn Institute for Employment Research in Kalamazoo.

Canadian health care is paid for by taxpayers and getting coverage isn’t linked to being employed. So Canadian employers pay a higher tax, but they don’t carry the same burden that business owners here do.

“I think what is coming into question now with the increasingly higher cost to health care is that the employer-based model really has to be looked at. And for employers that are basically competing against companies importing from different countries with different health care policies, this can lead to a serious competitive disadvantage,” said Erickcek.

For firms that compete locally, and not against foreign companies, the cost pressure is there but not as intense, especially if their competitors don’t offer workers generous health benefits. Their ultimate challenge is to keep costs near or below that of competing firms, which could result in a good plan, or one workers see as less than desirable, or none at all.

“A firm that has felt a responsibility to their workers to provide a good health care package may be competing against firms that are not so inclined to provide such a good program. That is also a disadvantage. On the local front, we are seeing companies becoming less generous, and some are not offering benefits at all,” said Erickcek.

“So I think the whole issue of how health care is going to be paid for is one that maybe we have avoided for too long,” he added.

Then there is the other side of the coin. While some economists believe higher health care spending lowers the GDP, drops overall employment and raises inflation, others just as strongly believe that the same spending creates jobs and profits for U.S. companies.

Health-related businesses are leading the employment surge in this region and are accounting for much of the new construction that is going up.

“What’s wonderful about health care is that it provides jobs for nearly all the skill levels — from very skilled surgeons to skilled nurses to relatively unskilled positions such as nursing assistants, maintenance and food service,” said Erickcek.

Erickcek pointed out it is getting more difficult to provide jobs for all skill levels due to the ongoing move from a labor-intense economy to a knowledge-based one, yet the health sector is accomplishing that.

“We also know that as health care grows, we’re seeing more and more supplier needs developing. Medical equipment and instruments are becoming more and more of our local businesses. So we’re seeing more of our office furniture industry turning their sights to medical furniture,” he said.

“It’s a growth field that may create more markets for some of our companies in West Michigan, which is a good thing.”

The Kaiser Foundation report said the growth in health care spending nationally was at 9.3 percent in 2003 — almost triple the country’s overall economic growth of 3.6 percent. And without that growth in health care spending, the overall number could have slid a full point.

There are as many reasons for that growth as there are analysts examining it. Elective surgeries, prescription drugs, and possibly unnecessary tests to pay for expensive medical equipment are three that are often mentioned.

And while the sector’s spending has been welcomed in the economy, the cost pressure being put on businesses isn’t. It may not end up being a good thing for the health industry, either, if the sector ends up charging more than many of its customers can afford to pay.

Erickcek didn’t see an easy solution to the dilemma. He didn’t think a switch to a federal single-payer system like the one in Canada, which would remove much of that cost pressure from companies, would be embraced by the nation’s lawmakers — at least not now.

“Without that, which would be the best alternative, I would suggest that employers develop a type of association where they can negotiate health care costs with service providers. It might be a better alternative than just doing it by themselves,” he said.

“I’m not quite sure how they would go about that. But they could have a team negotiate with the health providers and that might be a way to lower costs.”

Doing that would certainly be better than being sued.

National Health Expenditures (1960-2003)

Total U.S. spending on health care in 2003 grew 62 times higher from 1960.

1960

1985

2003

Total

$27 billion

$427 billion

$1,678.9 billion

Per capita

$143

$1,765

$5,670

Shares of GDP

5.1%

10.1%

15.3%

Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census

Total Health Care Expenditures
Per Capita (1970-2003)

Spending on health care in 1970 was similar throughout much of the world. But since then, health care expenditures on a per-capita basis in the U.S. have easily surpassed that of every other nation. By 2003 in the U.S., those expenditures had grown 16 times higher than in 1970 and had doubled just since 1990. 

Country

1970

1980

1990

2003

United States

$352

$1,072

$2,752

$5,711

Australia

$252

$691

$1,306

$2,886

Canada

$299

$783

$1,737

$2,998

France

$205

$697

$1,532

$3,048

Ireland

$117

$519

$794

$2,455

Japan

$149

$580

$1,116

$2,249

Sweden

$312

$944

$1,589

$2,745

Switzerland

$351

$1,031

$2,029

$3,847

United Kingdom

$163

$480

$987

$2,317

Source: Organization for Economic Cooperation and Development, OECD Health Data 2006 HQX

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