Rising Cost of Health Benefits Cited as Factor in Slump of Jobs

CAL/AAEM News Service calaaem_news at yahoo.com
Tue Aug 24 21:18:44 PDT 2004

Rising Cost of Health Benefits Cited as Factor in Slump of Jobs


August 19, 2004

A relentless rise in the cost of employee health insurance has become a significant
factor in the employment slump, as the labor market adds only a trickle of new jobs each
month despite nearly three years of uninterrupted economic growth.

Government data, industry surveys and interviews with employers big and small indicate
that many businesses remain reluctant to hire full-time employees because health
insurance, which now costs the nation's employers an average of about $3,000 a year for
each worker, has become one of the fastest-growing costs for companies. Health premiums
are sapping corporate balance sheets even more than the rising cost of energy. 

In the second quarter, the cost of health benefits rose at a 12-month rate of 8.1 percent
- more than three times the inflation rate and the rate of increases in wages and

"Health care is a major reason why employment growth has been so sluggish," said Sung Won
Sohn, the chief economist at Wells Fargo.

Although the economy emerged from recession long ago, posting 11 straight quarters of
growth, there are still about a million fewer jobs in the United States than there were
at the beginning of 2001, just before the country sank into recession. 

A spurt in job growth between March and May raised hopes that employment would emerge
from the doldrums. But job growth slowed sharply again in June and came to a virtual
standstill last month. In July, businesses added a mere 32,000 jobs, and for the first
time this year more businesses let workers go than hired new ones. 

Because of the cost of health insurance, "we are making decisions not to hire people,"
said Steve Hayes, the owner of Custom Electronics in Falmouth, Me., which installs
electronic systems like home theaters and communications networks in homes and offices.
"Before, we hired based on workload," he added. "Now it's a question of affordability."

Mr. Hayes said his health insurance premiums had risen by 22 percent a year in the last
four years. He now pays $4,150 a month in health insurance premiums for his 33 employees,
and the workers contribute an equal amount from their own pockets. The company's revenue
- less than $5 million annually - has been growing briskly, he said, but outlays for
health benefits are growing even faster, eating into the company's profits.

The increase in health insurance premiums reflects the rising cost of health care, which
is being driven by expensive new drugs, many of them heavily advertised to consumers;
medical advances including diagnostic tests that require costly new machines; and a
reaction to past restrictions in managed care health plans that sought to rein in costs. 

In the presidential campaign, both candidates have proposed measures for tackling the
high cost of health insurance, including tax credits for small businesses and low-income

President Bush has pointed out that consumers can buy relatively inexpensive,
high-deductible insurance to protect against catastrophic illnesses and can pay for
routine care with new tax-free health savings accounts. 

He also favors pending legislation that would let small businesses get volume discounts
by buying insurance through trade associations, a plan that is opposed by many insurers,
state insurance officials and some influential Senate Republicans. Critics say they are
concerned that those associations would be largely exempt from state regulation and their
insurance pools might attract healthier people, driving up costs for those who stay in
the traditional insurance market.

Senator John Kerry's campaign plans to weigh in today with its own study of the link
between rising health care costs and the employment slump. A summary of the report, which
was prepared by Laura D. Tyson, who served as an economic adviser to President Bill
Clinton, contends that industries with more health care benefits - like automobile
manufacturing - have suffered the biggest losses in jobs and that those, like food
service, that typically offer few benefits have realized the biggest gains.

"We're losing jobs in high-wage, high-benefits sectors like manufacturing, where
employers are responding to this surge in health care costs,'' Ms. Tyson said in an
interview yesterday. 

A centerpiece of Mr. Kerry's plan would be to reduce health insurance premiums by having
the federal government pick up 75 percent of the cost of catastrophic medical care. That
would reduce the cost to employers and employees about 10 percent, or $1,000 a year,
according to campaign officials.

Businesses, meanwhile, are trying all kinds of coping strategies. Some companies have
responded by shifting part of the health insurance burden onto their workers or by
ratcheting up premiums and deductibles. Some have eliminated coverage for dependents,
while others have canceled their medical plans altogether. Many have frozen or reduced
wages to compensate for ever bigger health insurance bills. 

"Our health care costs are rising at three to four times the rate of increase of our
revenues," said Michael Stoll, vice president for corporate benefits at the Kroger
Company, a supermarket giant that owns several retail chains, including Ralph's, Food 4
Less and King Soopers, and employs 290,000 people around the nation. 

Kroger, one of the targets of the five-month supermarket workers' strike in California
that ended in March, reached an agreement with unions in that state to retain existing
health benefits for current workers but to allow the company to offer new employees
significantly curtailed health plans. 

Trotter Machine, a small maker of parts for hydraulic valves in Rockford, Ill., has taken
a different approach. In the last year, the company has doubled the employee's deductible
on the company health plan, to $1,000 a year, and it has slowed wage increases - all in
response to the company's escalating health care premium, which has risen to $18,000 a
month from less than $10,000 five years ago. 

Trotter's business has picked up after two flat years, and the company has responded by
adding 12 full-time jobs since last November, bringing the total to 65 full-time workers
and 5 temporary positions. But health care inflation has instilled a new level of caution
in the hiring process: 9 of the 12 new workers started off as temps, achieving full-time
status only after three or four months on the job. 

"In the past we would hire people right out of the gate, and they could get on the health
plan in 60 days," said Skip Trotter, the company's vice president for operations. "Now we
use temp services. I can keep a temp for 90 to 120 days, and the agency pays for the
health benefits." 

The lagging job market has contributed to brisk growth in the temporary employment
industry, where jobs may or may not include health benefits. In July, 2.4 million people
were working for temporary agencies, according to the Bureau of Labor Statistics. That
was a 9 percent increase from a year earlier, compared with an overall increase in the
labor force of 1 percent, to 131.2 million.

Mr. Hayes, at Custom Electronics in Maine, says the soaring cost of health insurance has
tempted him to do away with health benefits altogether. But he has held back. 

"You lose your best people, you don't lose your worst people," he said. "I would rather
fire more of the bad people and keep the benefit than risk losing my good people."

Other businesses are resorting to tactics of dubious legality to avoid the health care

Phyllis Burlage, an accountant in Millersville, Md., whose clients include several small
businesses, said rising health insurance costs were driving some employers to skirt
age-discrimination law by hiring only younger workers as a way to reduce premiums. "It's
the deep dark secret of small businesses," Ms. Burlage said.

Even though the economy emerged from recession in late 2001, unremitting international
competition has led to continued financial restraint by American employers. They have
been uncharacteristically reluctant to invest in capital equipment and have tried to
wring as much productivity and profit as possible from their existing workers. 

"In other business cycles, businesses hired in anticipation of demand; that's no longer
the case," Mr. Sohn of Wells Fargo said. "Today businesses only hire people because they
have to, to meet demand."

In this economic environment, rising health care costs are particularly burdensome
because they increase labor costs even as wages are barely moving. In the second quarter,
wages for private-sector workers increased 2.6 percent from the year before, according to
the Labor Department's employment cost index. Yet the inflation rate for benefits,
primarily for health insurance, was 7.3 percent, pushing total compensation costs up 4

The trade-off between health and wages has become a prime workplace topic. In 2002, Local
226 of the hotel and restaurant workers union in Las Vegas negotiated a contract
agreement with casino and hotel operators for a blanket raise of 60 cents an hour, which
the union could apportion between wages and health care. 

The union considered the deal a victory because it allowed workers to maintain health
care benefits at virtually no cost. In the first year of the contract, though, all of the
increase ended up going to health care, leaving nothing for higher wages. "It was the
first time we had to sacrifice wages to health care," said Pilar Weiss, assistant
political director of Local 226. 

The growing portion of employee compensation used for health care ultimately depresses
workers' ability to spend on other items. And health care outlays can, in turn, force
automakers and other consumer-product companies to raise prices. 

The Big Three automakers spent $8.5 billion last year on health care. General Motors
estimates that providing health coverage for its workers and retirees adds about $1,400
to the price of each of its vehicles built in the United States. 

Allan D. Gilmour, the vice chairman at Ford Motor, said it was difficult to trace a
causal relationship between higher health care costs and weak employment, because hiring
decisions were driven by many factors. But he agreed that escalating health care costs
were a drag on the labor market. 

"Health is a larger and larger part of our compensation package," Mr. Gilmour said. "It
is hard to know what we are doing or not doing because of this. But on a macro level
there's no question about it: this pressure comes to bear on everything we do."

Milt Freudenheim and Edmund L. Andrews contributed reporting for this article.

Source: The New York Times Company, Copyright 2004

Cyrus Shahpar & Brian Potts 
Managing Editors, CAL/AAEM News Service 

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