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Study: Health Care Costs Threaten American Businesses in Global Economy

By Sara Lubbes, CQ Staff

May 9, 2008 -- The ever-rising costs of health care puts American businesses at a disadvantage when trying to compete with firms overseas, according to a new study released this week by the New America Foundation.

Foundation health policy director Len Nichols, who served as senior adviser for health policy during the Clinton health overhaul efforts of 1993–94, said the U.S. health care system—in which 60 percent of all residents are covered by employer-sponsored health insurance—puts the country at risk of losing "good jobs" to companies in other countries.

The study, co-authored by New America Foundation Program Associate Sarah Axeen, found that U.S. firms spent twice as much on health care in 2005 as their foreign competitors. For every American worker making $18 an hour, U.S. companies spent $2.38 per hour for that worker's health insurance. In contrast, firms in Canada, Japan, Germany, the United Kingdom, and France paid workers an average $20 per hour and spent 96 cents per hour on health care for each worker.

Meanwhile, American workers are also spending more on health care. Nichols says the average worker contribution for family health insurance has increased by 102 percent since 2000.

Nichols maintains that the wide cost difference between U.S. health costs and those overseas threatens the nation's ability to compete in the global marketplace.

But he also says it is impossible for companies to shift all of the burden of health insurance costs to workers. Union contracts get in the way, and employers cannot match salary increases or decreases to highly variable health care costs.

"Health care costs growth produces a series of 'shocks' of varying magnitude that cannot be fully shifted into wages in the short run," Nichols says. "Because the shocks persist, employers cannot get to the long-run equilibrium where health costs are fully shifted" to workers.

Instead, businesses end up having to bear a fair share of the costs, making it attractive to relocate operations overseas where firms do not contribute as much to their workers' insurance plans, Nichols says.

The solution, he suggests, is for the U.S. government and individual workers to pay more of their own health insurance costs.

Under that system, employers would be required to "cash out" health plans and convert health care contributions into raises for their workers. Workers would then use the money to purchase health insurance.

Nichols' suggestions fall in line with legislation by Ron Wyden, D-Ore., whose bill (S 334) would create a worker-based system.

Under Wyden's measure, state-based "Health Help Agencies" would offer workers information and guidance to buy the right insurance plan. The proposal would encourage plans with low-cost preventive care and chronic disease management—all with an eye toward reducing future health care costs.

Brian Baird, D-Wash., is sponsoring a companion bill in the House (HR 3163). Neither measure has seen committee action.

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