September 1, 2005

From Bad to Worse

Health care hasn't been kind to U.S. companies, only cruel.

The spiraling cost of health care has adversely affected nearly every business in the nation, save perhaps for a few medical providers and insurance companies that have figured out how to profit from the situation. For the metals and heavy manufacturing sectors, with aging workforces and labor-intensive processes, the burden has become particularly heavy. This spring, for example, when the debts of General Motors Corp. and Ford Motor Co. were downgraded to junk-bond status, both companies blamed soaring worker health-care costs. Famously, it was William Ford, CEO of the auto giant, who told an audience at the U.S. Chamber of Commerce last November: “We spend more on health care than we do on steel.” Health coverage per worker easily can top $9,000 to $10,000 per year.

While it comes as no surprise that rising health-care costs are crippling the automakers, for their suppliers like Delphi Corp. and plenty of other companies, there are other repercussions that have attracted less attention. Economists blame health-care costs for the slow pace of hiring that has plagued the economic recovery; they are a major factor in the trend toward outsourcing to developing countries like China and India; and the difficulty of providing health benefits is putting a strain on the tenuous relationship between workers and management. “Take a look at what has been the biggest barrier in [union] contract negotiations and the number of strikes that have resulted,” says Vernon Weckwerth, professor of health care administration at the University of Minnesota. “Four out of five of them are over health care.”

Indeed, rising health-care costs to cover America’s aging population could become the nation’s greatest global competitive challenge. That’s because in countries like Japan, Germany, the United Kingdom and Canada—all of which have government-run universal health coverage—the health-care cost burden is spread more evenly across the population. Companies based in those countries don’t have massive legacy costs from promises to pay for retiree health care. “As the economy becomes more global, U.S. companies will find that they are increasingly at a disadvantage due to our health system,” Weckwerth says. “That’s already happening.”


Some predict the underlying trends that contribute to double-digit health-care cost increases are just starting on the upslope. Certainly, the aging population is a trend that will intensify for the next 20 to 30 years. Technology continues to push the envelope with massively expensive treatments, such as faster imaging equipment, expensive diagnostic machines and new biotechnologies that continue to flood the market, often with little cost-benefit or duplication analysis. Pharmacy costs also are expected to maintain their position as the fastest growing portion of the health bill, thanks to new medications and sophisticated marketing campaigns to sell them. “Everything I look at seems to say that [these problems] are going to be around for awhile,” says John Asencio, a senior vice president at The Segal Co., a benefits, compensation and HR consulting firm in New York. Asencio, who has studied actuarial, demographic and cost trends, says that while there will be periods of moderation—a Segal survey shows that large companies expect their medical costs to grow by less than 10% this year—the overall trend will be toward health-care cost increases that far surpass inflation, which averages roughly 3%. Meanwhile, experts also bemoan the fact that there is little cost-benefit analysis in health care.

Yet another long shadow looming over health care’s future is inexorably tied to demographics. The United States has the same problem with health care that it does with its pension system: fewer workers supporting a growing number of retirees. “The difficulty comes when the workforce continues to shrink,” Asencio says. “The remaining workers have to be that much more productive to pay for the health benefits of retirees.”

Adding to the health-care cost quagmire, the growing ranks of the uninsured place immense strains on the
system. Employers and workers shell out a combined $922 more in insurance premiums per family to pay health-care costs for the uninsured, a figure that will jump to $1,500 by 2010, according to a study by Families USA, a health-care advocacy group based in Washington, D.C.

Meanwhile, medical providers such as hospitals have been consolidating, giving employers less clout to negotiate favorable pricing. Yet hospitals aren’t doing any better because of it. “Health costs to the providers are growing faster than the reimbursements they receive,” Weckwerth says, stressing that roughly one in three hospitals already operates at a loss.

All that spending has contributed to steadily rising life expectancies. In 1900, life expectancy at birth was 46.3 years for men and 48.3 years for women. By 2003, it had reached 74.8 years for men and 80.1 years for women, the National Center for Health Statistics reported.

Despite those gains, the evidence suggests that Americans could be doing even better. Obesity, for example, now is considered to be at an all-time high, and it’s getting worse. “The expectation is that people can live as unhealthily as they want and a medical miracle will come along to fix it,” Weckwerth says. Obesity and overweight conditions contribute as much as $93 billion to the cost of providing health care in the United States, according to a study by RTI International, and the Centers for Disease Control and Prevention. It all adds up to a system that’s broken and costing employers billions of dollars.


The greatest hope for reforming the health-care system could well be consumers themselves. More employers are adopting consumer-directed health plans that involve employees more in the decision-making and purchasing process. Employees get a high-deductible insurance plan along with either a health savings account (HSA) or a health reimbursement account (HRA). HSA’s are owned by the employee, while an HRA is a nominal account that the employer controls. Both accounts cover first-dollar care up to a certain amount, and then the employees pay for the rest until the insurance-plan deductible kicks in.

The idea is that employees will become better consumers of care because they are paying for a portion of it out of their own pockets. “HSAs and high-deductible health plans attack some of the drivers of health-care costs, frequent use of health services paid for by others,” says Helen Darling, the president of National Business Group on Health, which represents 236 large employers on health-care issues. A study by Mercer Human Resource consulting found that 14% of large companies (500+ employees) say they are likely to offer a high-deductible plan with an account-based funding mechanism this year, and more than one in four say they are likely to offer them by the end of 2006.

More and more employers now see health care less as a benefit and more as a shared responsibility, says Bruce Peterson, office practice leader for group and health care in Michigan at Watson Wyatt Worldwide, a human resources consulting firm. For this reason, employers are turning to wellness programs to encourage employees to maintain their health.

While the idea is not a new one, these programs now are becoming a vital part of the health-care strategy. “The most important change to health care in the last five years is that employers see health-improvement programs as essential to cost control and productivity,” Darling says. According to a Watson Wyatt report, this year, 40% of employers offer health plans that include lifestyle behavioral change programs, up from 20% that offered them last year. Similarly, 32% offer obesity reduction programs, compared with just 14% in 2004.

Darling says the plans are especially important at heavy manufacturing companies, which tend to have numerous middle-aged men on their payrolls. “This is the least healthy segment in the population,” Darling says, stressing that the segment has a high incidence of preventable and costly conditions, such as high cholesterol, high blood pressure and diabetes.


Whether such plans pay off with reduced health-care costs remains to be seen. In the meantime, companies will continue to shift costs to workers and tinker with their plan design to try to stem some of the damage from rising costs.

The landscape also is likely to shift from a sense of entitlement on the part of workers to one where employers make a fixed contribution to cover care. While to some that might seem like a cop-out on promised coverage, other experts maintain the shift is in the best interest of the workers themselves. “The tragedy is that workers don’t understand that we are sending their pay raises to the health sector,” Darling says.


Play hard ball: Rising health costs can have such a dramatic effect on manufacturers that they sometimes even may dictate whether a plant is shut down or remains open. Last year, for instance, Alcoa Inc. wanted to reopen a smelter in Wenatchee, Washington, to take advantage of the rising price of aluminum. The plant was closed in 2001, but workers remained on the payroll.

The company said it would only restart the plant if workers agreed to pay 10% of their health-care premiums and share additional health-care costs. In effect, Alcoa asked the plant workers to choose between their jobs or health-care givebacks. The workers refused, and Alcoa threatened to close the plant for good.

The company went so far as to announce that it would take a $20 million write-off to close the plant, and it sent layoff notices to the 400 workers. In the end, the workers accepted the deal, and the plant reopened last December. “We actually said 3 things were needed to re-open the plant—1) a favorable power contract (which we got); 2) legislative programs (which came through); and then 3 a new contract that included the healthcare aspects… We achieved the first 2 items early on and the laggard was the labor contract,” says Kevin Lowery, an Alcoa spokesperson. “First, a favorable power contract, which we got; second, legislative programs, which came through; and third, a new contract that included the health-care aspects. We achieved the first two early on. The laggard was the labor contract.”

Offer consumer-directed health plans: In 2002, Logan Aluminum Inc., a Russellville, Kentucky-based manufacturer of aluminum sheet products, suffered through a health-care cost increase of 22%, on top of increases of roughly 12% a year for the three preceding years. The company had had enough. Rather than shift more costs to its 950 workers, Logan established a consumer-directed health plan provided by its insurer, Aetna Inc. “We tried to tackle the root cause of the problem,” says Howard Leach, head of human resources. The company also installed a wellness program to provide incentives for healthy behaviors.

The plan works by using a relatively high deductible of $2,000. Logan then gives workers a health reimbursement account (HRA) that it funds each year with $800 for each family. (Logan employees can earn an extra $200 toward the account by filling out a health risk assessment.) This year, Logan added a health savings account (HSA), which it funds at $1,100 for each family, with a deductible of $2,900. Whatever remains in the account can be rolled over to the next year. The middle portion, known as the “doughnut hole,” comes out of employees’ pockets if they exceed the company contribution. Any preventative care is covered for free with the HSA, so workers don’t put off regular checkups. The HRA pays $75 toward preventative care.

Not only did the move save Logan from massive cost increases, but health costs actually decreased, going down 5% in 2003 and 1% in 2004. “We’re hopeful that by year end, our costs will be flat with 2002,” Leach says. “It’s a realistic expectation.”

Cut costs by cutting pounds: Worthington Industries, a steel-processing company based in Columbus, Ohio, had health-care costs that were doubling every five years. “They keep going up every year in huge jumps, but you’re not getting anything extra in return,” says Harry Goussetis, vice president of human resources at Worthington.

So at the start of last year, Worthington launched a new health initiative aimed at giving employees incentives to live healthier lives. It also asked them to pay part of their health-insurance premiums. But rather than just shift costs to employees, Worthington created a system where employees who signed up for the wellness plan could earn credits toward the employee portion of the plan. The response was high: 65% of employees signed up in the first year. “The goal of the wellness program is to focus employees on the things they can do to engage in healthier behaviors, and an economic incentive to see the tie between the behaviors and health costs,” Goussetis says. He notes that it’s too early to know whether the program is paying off, but he expects good results over the long-term. In the meantime, “there have been a few cases where a dangerous condition was identified earlier than maybe it would have been,” he says, “and you can’t put a price on that kind of a result.”

Devise programs at the state level: The idea of nationwide universal health-care coverage is unlikely to gain traction anytime soon, and some would argue, for good reason. But during a conference call to analysts and investors, GM CFO John Devine vented his frustration with the lack of solutions for the health-care crisis coming from government: “Our sense is it’s going to take a long time for that to bear any fruit in Washington, if ever.”

But in what some see as a positive sign, state governments are taking up the cause and putting together plans to offer employers some relief on health-care costs. West Virginia and Connecticut, for example, have started programs where they use their collective buying clout to bargain for health insurance and pharmaceuticals on the part of employers in the state. Elsewhere, Pennsylvania, Rhode Island, Massachusetts, Utah, Illinois and Michigan offer premium assistance to employers that qualify. New York and Arizona offer reinsurance for small businesses that covers a portion of a private insurer’s claims. And Maine and New Mexico are hatching plans to provide subsidized medical insurance to low-income workers in the state. “Over the next five years, many states will develop and implement major health system improvements, offering a nation-wide laboratory of experimentation,” says Karen Davis, president of The Commonwealth Fund, a New York-based health care research and advocacy group.