Posted on: Monday, August 9, 2004

Medical benefits now cost employers more than vacation

By Kristen Gerencher
CBS MarketWatch

SAN FRANCISCO — The cost of providing healthcare to workers has surpassed that of paid leave as the most expensive benefit for employers, according to a new report.

In the first quarter of this year, medical benefits accounted for 23 percent of compensation outside of wages, compared with 22.6 percent for paid leaves, including vacations and sick time, according to a study by the Employment Policy Foundation, an economic-research foundation that focuses on workplace issues.

It's the first time in the past 10 years healthcare costs exceeded the paid leave category, foundation president Ed Potter said.

Employer spending on health benefits jumped 12.4 percent between 2002 and 2003, more than five times the inflation rate, he said, noting that small employers face cost increases that are far higher.

"The private sector, as far as I can see, has essentially maxed out on what it's able to do," Potter said.

"When you have large companies who historically have been able to pay, who no longer are able to be competitive by paying the bill, you come to appreciate there's a problem here."

The EPF, which receives about half its money from businesses, examined government data from about 8,200 private employers. It found that employers spent nearly $331 billion last year for employee health insurance, a 51 percent jump since 1998, when they spent $219 billion.

Companies paid $3.80 per hour, on average, for each worker who participated in their health plans in 2003.

The ballooning tab for medical benefits bodes poorly for workers' raises, Potter said.

"It's such an increasing part of the overall compensation for employees that there is the inevitable consequence that wage increases are going to be affected by this," he said. "Gradually, this benefit cost alone is eating away at the overall compensation pie."

Salaries are growing only modestly this year, according to a report from WorldatWork.

Though patient cost-sharing has eased some of the burden on employers, it's a relatively new phenomenon among large companies and one that's nearly absent in union contracts, Potter said.

As a result, many companies are less competitive than they could be if they had lower healthcare costs, he said.

"I don't think the private sector can absorb it and be competitive. They wouldn't have gone to cost-sharing if that were not the case."

The percentage of private-sector workers covered by and participating in job-based health insurance declined to 45 percent in 2003 from 53 percent in 1999, the report said. That may reflect the 39 percent of working families who have two breadwinners and may choose to be covered under one policy, Potter said.

Still, the EPF's figures are far lower than those reported by the Center for Health System Change, which said earlier this week that the proportion of Americans under 65 covered by employer health benefits dipped to 63 percent last year from 67 percent in 2001.

Moving to a consumer-based or age-based system may help ease the mounting problems employers face in paying for health insurance, Potter said.

Younger people, for example, may prefer to have a catastrophic policy rather than a more comprehensive "Cadillac" health plan so they can receive higher wages, while older people may prefer to allocate more of their compensation to broader coverage, he said.

"Presumably, as we get older our earning power should be better than it is when we're younger and we can elect to make some decisions about healthcare, whereas a younger person, we may prefer money instead," Potter said.

Overall, all healthcare payers — businesses, government and individuals — need to re-evaluate their assumptions about medical costs, he said.

"We've gotten to where we are because it did appear to be free and it has basically evolved into a system where you and I expect, if our knee is hurting, that an X-ray will not do, that we need an MRI instead," Potter said. "Even the richest nation in the world can't afford to do that for everybody."