The Global Manufacturer: Health Care and the Sour Taste of Good News

"We're going to be working on health care costs for the rest of our lives," GE CEO Jeffrey Immelt told the manufacturing summit convened by Walmart on August 22 in Orlando.

Immelt is unlikely to be going out on a limb with that observation. The U.S. spends so much on health care that, taken on its own, U.S. health care would be the sixth-largest economy in the world. In 2011, the U.S. spent $8,508 per person on health care, two and a half times more than the rest of the industrialized OECD nations.

As has been well documented, money can't buy happiness nor, apparently, health. Despite spending $2.8 trillion on health care, U.S. life expectancy is 18 months less than the OECD average. The U.S. has fewer physicians per capita (2.5 per 1,000 population) than the OECD average of 3.2 and fewer hospital rooms (3.1 per 1,000 population compared to the OECD average of 4.8). However, the U.S. is well ahead on purchasing expensive computed tomography (CT) scanners and magnetic resonance imaging (MRI) units compared to its OECD counterparts.

The politically charged Affordable Care Act, aka Obamacare, was supposed to accomplish two broad goals -- extend health insurance to all Americans and "bend the curve" of unsustainable health care costs. So it was good news last month when the Kaiser Family Foundation released its annual survey on employer health benefits and reported that family health premiums rose 4% in 2013, a continuation of recent smaller price increases.

"We are in a prolonged period of moderation in premiums, which should create some breathing room for the private sector to try to reduce costs without cutting back benefits for workers," Kaiser President and CEO Drew Altman said.

While good news, the Kaiser announcement barely made a dent in the continuing handwringing over health care costs. That concern is not misplaced, given that many experts believe the recent slowdown in cost increases is due primarily to effects from the recession and only in small part to legislative changes. Some estimates point to a resurgence in cost increases, with health care climbing to more than 20% of GDP in the coming decade.

In our first-quarter 2013 NAM/IndustryWeek Survey of Manufacturers, 74% of respondents said rising health care costs were the number one challenge facing them. Last year, 70% of CFOs in a Deloitte survey said they expected their company's health care costs to rise as a result of health care reform, with many predicting an increase of 10%.

Employers have been trying to maintain the status quo on health care cost-sharing with their employees, says Rick Wald, the national practice leader for Deloitte Consulting's employer health reform strategy practice. "Typically, companies are paying 70% to 80% of the cost of health insurance for their employees and 60% to 70% of the cost for dependents," he notes. As costs go up each year, employers are trying to pay the same percentage of the cost. But for employers and employees, the end result is that even moderating health care increases are running well ahead of inflation and, frequently, revenue and wage gains. Thus, even good news has a sour taste.

In the short run, don't expect significant changes in employers maintaining coverage of employees, says Wald. Last year, Deloitte polled employers and only 9% were seriously considering dropping coverage. That group was predominantly small to medium-size employers. But further out, he adds, employers might opt for dropping coverage if they see that the new health care exchanges are working and providing employees with acceptable alternatives.

For more coverage on health care and manufacturing, visit www.iw.com/healthcare.

Even as the national policy situation unfolds, employers will continue looking for ways to contain health care costs. According to Towers Watson and the National Business Group on Health, the best-performing companies are taking steps such as broadening financial incentives to employees for taking better care of their health and providing more consumer information on health care providers. Through these efforts, they noted, these companies had an average health care cost increase of 1.7% in 2012, less than half the median increase. It's not the whole answer, but it does add a sweeter note to the bitter stew of health care reform.