Correction to this Article
(posted: 05 Jan. 2004)
This article in the December 2004 issue of Today's Engineer
incorrectly stated that GM's costs for health care run $63
billion per year. GM expected to spend $5.1 million in 2004 to
cover health care costs for its employees, retirees and their
dependents, compared with $4.5 billion in 2002 and $3.0 billion
Is the End to Employer-Paid Health Care Near?
by George F. McClure
began offering health care insurance as an employee benefit
during World War II, in response to imposed wage and price
controls, which limited employers’ ability to attract desirable
employees by offering them more salary. To stay competitive,
employers offered control-exempt benefits. Health care
insurance, better pensions, company-paid life insurance,
disability insurance and more liberal vacation policies all took
have labor unions have negotiated benefits coverage in their
labor contract renewals. In turn, many of those companies have
extended the same benefit improvements to their non-union exempt
employees. Some have negotiated retiree health coverage as well
as coverage for active employees.
To cover the
costs, large manufacturers have had to build a benefits cost
into the products they sell. General Motors pays benefits that
include 100 percent health care for active and retired
employees; more than 80 percent of the insured are retired.
These and other benefit costs have reduced the average profit
per vehicle significantly at GM. Health care and retirement
medical costing 2003 ran $19.14 per hour per worker at GM, but
only $3.76 at Toyota North America (www.industryweek.com/CurrentArticles/asp/
In March, GM announced that its future obligation for employee
and retiree health care topped $60 billion in 2003. GM Chief
Financial Officer John Devine said the company expected to spend
$5.1 million in 2004 to cover health care costs for employees,
retirees and their dependents — $1,400 per
vehicle sold — more than the cost of the steel needed to
manufacture those vehicles (www.detnews.com/2004/autosinsider/0403/11/a01-88813.htm;
could afford the costs for these benefits when those costs rose
only as quickly — and in proportion to — the general rate of
inflation. But in recent years, health care costs have risen
much faster than the inflation rate, forcing many employers to
rethink their benefits packages.
Sixty percent of the non-elderly population in
the U.S. has health care coverage through an
their costs, employers have begun shifting more of the health
care burden to their employees. Employee shares for
contributions to plans are higher, deductibles have increased,
and co-pays have gone up, especially for services by providers
outside Preferred Provider Organizations (PPOs), which offer
negotiated reduced rates.
deductible for a PPO serving a family of four rose 43 percent in
2002, 9.5 percent in 2003, and another 4.3 percent in 2004.
Health Maintenance Organizations (HMOs) focus on managing care,
including preventive medicine, to avoid expensive treatment
later. A $40 prescription drug may prevent a $40,000 bill for a
heart attack later (www.pfizer.com/are/about_public/hank_mckinnell.html).
Looking at Tax Developments
employers can deduct the cost of benefits they cover as an
employee expense as they do salaries (www.ebri.org/sehbs/fstaxes.pdf),
they are looking at tax regulation developments that would make
the cost of premiums paid by the self-employed tax-deductible.
It’s only a short step to moving the entire cost of employee
health insurance to employees and making that cost tax
deductible for the employee, too. However, tax reforms discussed
after the president’s re-election could eliminate deductibility
of employer-paid health insurance premiums, pushing that
responsibility onto the workers, as part of The Ownership
costs continue to rise, more and more smaller firms are dropping
their health insurance benefits all together. The average cost
to insure a family of four has reached $9,950 per year, compared
with $3,695 for coverage of a single employee. For firms with
between three and 24 workers, the average family premium
increased 13.6 percent this year. This compares with a 2.2
percent growth in wages and a 2.3 percent growth in inflation
for the same period (www.msnbc.msn.com/id/5951804).
In 2004, 63
percent of employers offered health benefits, compared with 68
percent in 2001. During that same period, the number of jobs
with health benefits fell by at least 5 million.
As these small
firms drop their health coverage, their employees are forced to
look for coverage on their own or join the ranks of the
uninsured — some 43 million now in the United States (www.census.gov/prod/2003pubs/p60-223.pdf).
Critics of this trend say that employers have more market muscle
than individuals do and can negotiate better deals.
recognize the difference in their premium costs for single
versus married employees and add some of the difference to the
paychecks for the singles. The ultimate case could be adding the
employer premium cost to employees’ pay and having those
employees find their own health care insurance. An argument for
that is to level the playing field in globalized competition
with firms in parts of the world where health care is a
government-provided benefit, and therefore is not included in
the consumers’ product cost. In addition, Health Savings
Accounts that replaced Medical Savings Accounts in the Medicare
bill last year help small employers and individuals to provide a
high-deductible health insurance benefit coupled with a
tax-deferred account in which the employee can place dollars to
pay part of the deductible if health care is needed (www.kiplinger.com/features/archives/2004/02/hsa.html#flex2).
In June 2004,
average benefit costs amounted to 29.1 percent of payroll:
Security, Medicare, other mandated benefits
health and disability insurance
Retirement and savings
Bureau of Labor Statistics
care is another area in contention. Some firms that previously
promised retiree health care benefits have been rethinking that
promise with an eye on the bottom line. Early retirement
packages now sometimes include a capped contribution to
retirees’ health care, with retirees being responsible for
covering all future escalations.
bill passed last year included some $80 billion over 10 years as
an incentive to employers to keep their retiree health plans.
Even so, some companies cut back. The corporate tax reduction
bill just passed had other provisions that encouraged companies
such as Lucent Technologies — which just announced that net
income had tripled on a 19 percent revenue increase — to cut
back again on retiree health care (www.mcall.com/business/local/all-retireesoct15,0,2725154.story?coll=all-businesslocal-hed).
The trend is
clear: where union contracts permit, more and more of the cost
will be shifted to the employee. At some point, employees will
be in the same situation as the self-employed are now — shopping
around for the best health insurance deals.
McClure is chair of the IEEE-USA Communications Committee and a
past chair of the IEEE Member Conduct Committee. He can be
email@example.com. Opinions expressed in this article
are the author’s.