Is the End to Employer-Paid Health Care Near?

by George F. McClure

Employers 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 center stage.

Companies that 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/
printerfriendly.asp?ArticleId=1503). 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; www.charleston.net/stories/091904/bus_19retire.shtml).

Employers 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.

To control 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.

The average 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).

Employers Looking at Tax Developments

While 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 Society.

No Insurance

As employer 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.

Some employers 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:

Retiree Benefits

Retiree health 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.

The Medicare 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.

George F. McClure is chair of the IEEE-USA Communications Committee and a past chair of the IEEE Member Conduct Committee. He can be contacted at todaysengineer@ieee.org. Opinions expressed in this article are the author’s.