Economic Trends Facing The Employer

For many years, both public and private employers in the United States have faced multiple economic and financial challenges, during cycles of growth and recession within the economy. Powerful economic realities are forcing corporations to reduce operating costs and improve productivity in order to survive in an increasingly competitive global environment. Simultaneously, employers often face key labor shortages in positions that require new and specialized expertise critical to businesses' new growth and development. Plan sponsors are caught in the paradox of providing an attractive benefits package in order to attract and maintain a well trained, productive workforce while trying to manage health care benefit expenses within viable budgets. Creative and cost-effective solutions are needed so that plan sponsors can attract, retain, and motivate talented people who are vital to their success in today's economy. Some of the economic pressures facing employers are discussed below.

Federal Government Cost Shifting
Government-funded health care programs continue to experience escalating cost increases, particularly the Medicare and Medicaid programs. Attempts to contain federal health care expenditures have shifted costs both directly and indirectly to the state and local governments and to the private sector. Private health care plans bear a large share of the burden of federal cutbacks to Medicare providers. Squeezed by Medicare reimbursements that often are below their costs of operation, hospitals and physicians are forced to shift costs to other payers to make up for lost revenues.

Beginning with the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), federal legislation has shifted portions of Medicare costs directly to private employer plans. Federal law requires that active employees over age 65 select either Medicare or their employer's health plan as the primary source of medical coverage. Employers are prohibited from providing secondary or supplemental coverage to employees who select Medicare as their primary coverage. Because employer plans typically provide richer benefits and easier access to medical providers than Medicare, it is not surprising that many employees continue their primary coverage through their employer's plan. As a result, employers have been forced to accept greater responsibility for financing the medical care costs of an aging population.

Competitive Global Environment
U.S. companies also face increased economic pressure from new global competitors. In addition to dominant economic players in Western Europe and Japan, entrants from developing nations and former European communist bloc nations are playing a greater role in international production. Alliances among foreign capital markets, such as the European Economic Community pact of 1992, test the ability of U.S. companies to compete with the collective strength of nations linked by free-trade agreements.

Furthermore, much of workers' medical care in competing foreign companies is provided through governmental programs, such that the direct costs of health insurance are less directly identifiable as part of a company's costs of production.

Shrinking Workforce
Both private- and public-sector employers are operating today with a tightening supply of trained labor for critical new positions. Since the 1970s, most industrialized nations—including the United States—have faced flat or even negative net population growth. In addition, the baby boom generation (born between 1946 and 1964 inclusive) is now well into midlife and will retire in large numbers over the next 10 to 15 years. Confronting a shrinking workforce, employers have been forced to offer more competitive wages and benefits in order to attract qualified employees. Acute labor shortages are projected in the areas of science and technology, health care, and hospitality services. Thus, employers must maintain competitive compensation packages to attract and maintain a stable and highly qualified workforce. Doing so will require employers to offer an enticing and well-developed package of employee benefits.

National Resources Spent on Health Care
Total national health care expenditures exceeded $1.5 trillion in 2002, an increase of 115 percent over the $699 billion spent in 1990 and 507 percent over the $247 million spent in 1980. Annual growth rates in national healthcare expenditures averaged 10.6 percent in the 1960s, jumped to an average of 12.9 percent in the 1970s and slowed only slightly to 11.0 percent in the 1980s. While the average growth rate dropped to 6.5 percent in the 1990s, the rate was still more than double the general consumer price index (CPI).

While these total dollar expenditures seem staggering, perhaps more startling is the fact that health care costs, which accounted for about 5.2 percent of gross domestic product (GDP) in 1960, consumed more than 14.9 percent of GDP by 2002, according to Department of Labor statistics. While growth rates leveled during the mid-1990s and general economic growth kept pace with these levels, healthcare expenditures growth has catapulted ahead of economic growth since 2000 and, in 2003, healthcare expenditures grew 9.3 percent versus just 3.6 percent growth in GDP.