Increasing health care costs are not a serious problem for US businesses

Ever since the burden of health care expenditures for current employees and retired workers was cited as one factor in the collapse of General Motors, there have been many media reports decrying health care costs increase as the reason US businesses are losing international competitiveness. President Obama spoke in a similar vein during debates on health reform.
However, the health care industry is creating new jobs every month, even in the current economic crisis, and continues to be the biggest engine driving the growth of the US economy. How then should we understand this paradox that surrounds increasing health care costs?
The truth is, health care represents a very serious fiscal problem for the country, but for businesses it is an issue that has been overcome. The burden of health care expenditures became too much for GM simply because of poor judgment on the part of GM management.

<Table 1> Increase cause of employer costs per hour worked for employee compensation (US dollars)
Increase amount
Proportion of increase amount
Labor costs per hour 19.85 27.46 7.61 100%
  Wages and salaries 14.49 19.45 4.96 65.2%
Total benefits 5.36 8.02 2.66 35.0%
  Health care expenses 1.33 2.32 0.99 13.0%
  Health insurance 1.09 2.00 0.91 12.0%
Medicare 0.24 0.32 0.08 1.1%
Retirement and Savings 1.56 2.27 0.71 9.3%
Unemployment insurance + Workers' compensation 0.46 0.63 0.17 2.2%
Other 2.01 2.80 0.79 10.4%

NB: Represents actual figures as of March each year. The cost of company benefits represents only the employer's contribution, while the employee's contribution is included in "Wages and salaries." "Health insurance" is health care premiums for the employee and their family. "Medicare" is a system in which health care funding for the benefit of the disabled and those over the age of 65 is provided for by the current generation of workers in equal shares by employee and employer. Figures have been rounded up and totals may not correspond exactly.
Source: US Department of Labor, "Employee Costs For Employee Compensation."

This can be seen because, as Table 1 shows, between 2000 and 2009, health care expenses account for only 13% of labor costs increase for US businesses. Furthermore, as can be seen from Table 2, the employer share of expenditure on health services and supplies was only 25% as of 2007. In Japan, it is the rule that employers and employees contribute equally to health insurance premium, but in the US, until the first half of the 1980's, there were many businesses who provided expensive health insurance to their employees at 100% employer contribution.
However, because health insurance premiums continued to rise, labor negotiations were conducted to reduce the percentage of employer contributions, and employers succeeded in reducing their share from 77.2% in 1987 to 74.7% in 2000, and then to 71.3% in 2007.
In the past 20 years, the share of individual contribution to expenditure on health services and supplies has fallen by 9 percentage points from 40% to 31%. As a result of the government assuming responsibility for this gap, the share of government contribution has risen by 10 percentage points from 30% to 40%.

<Table 2> Employer contribution share to health care cost in the US
  1987 2000 2007
Employer contribution share to health services and supplies expenditures 26% 27% 25%
(for comparison) Government share 30% 35% 40%
Individual share 40% 34% 31%
Other Private funds 5% 4% 4%
Employer contribution share to health insurance premiums 77.2% 74.7% 71.3%

NB: The above health service and supplies expenditures only include the costs of treatment and do not cover the cost of research and investment in infrastructure. Figures have been rounded up and totals may not correspond exactly.
Source: US Department of Health,"Sponsors of Health Care Costs: Businesses, Households, and Government, 1987-2007."

Behind this increase in governmental spending on health care is an increase in the number of people who qualify for Medicare and Medicaid. It is vital that the increasing rate of per capita health care expenditure be lowered in order that President Obama may reform the health care system to have a positive effect on his fiscal reforms. The reason why the rate of increase of per capita spending on health care in the US remains high is the speedy introduction into clinical practice of newly developed medical services, in combination with the fact that it is not effective enough to leave the health care pricing solely to the market. Therefore, President Obama is developing policies which will limit the rate of reimbursement under Medicare and Medicaid as well as preventing unnecessary treatments and other health care services.

Yukihiro MATSUYAMA , Other Columns & Papers

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