February 8, 2004
Whose Problem Is Health Care?
By DANIEL GROSS
It comes as no surprise that America's beleaguered manufacturers operate at a disadvantage to competitors based in China and Mexico, countries with rock-bottom labor costs and threadbare safety nets. But, increasingly, they are also having difficulty contending against rivals in developed countries.
American companies have ingeniously managed to contain labor costs through productivity gains, outsourcing and limiting wages. But the factors over which manufacturers have less control - structural costs like those for corporate income taxes, employee benefits and rule compliance - have surged, according to a study released in December by two trade groups, the Manufacturers Alliance and the National Association of Manufacturers.
Comparing wage compensation to total value added in manufacturing in several countries, the study concluded that the United States was more competitive than Canada, Germany, Britain, South Korea and France. But throw in structural costs - which add 22.4 percent to the cost of doing business in the United States - and American manufacturers' costs exceed those of counterparts in Canada, Britain and South Korea. Even France, reputedly hostile to business, isn't far behind.
How is it that the American economic system, thought to be far more friendly to businesses than the European system, has become a competitive disadvantage for American manufacturers? One of the main culprits is health care. And the solution may be something that has traditionally been anathema to corporate chieftains: bigger government.
After corporate income taxes, employee benefits are the second-largest structural cost for American manufacturers, adding 5.8 percent to costs, according to the study. In all major economies, paying for health care means a combination of public and private money. But in the United States, businesses pay a larger chunk than do their European and Asian counterparts.
"In Canada, for example, a lot of the expenditures for health are funded out of general revenues," said Jeremy Leonard, an economic consultant for the Manufacturers Alliance, and the report's main author.
In Canada, the private sector spends 2.8 percent of gross domestic product on health care; in the United States, the private-sector figure is 7.7 percent. And American private-sector spending falls disproportionately on big employers like manufacturers. Some 97 percent of members of the National Association of Manufacturers provide health care coverage for employees. In 2002 alone, General Motors, which covers 1.2 million Americans, spent $4.5 billion on health care.
Uwe Reinhardt, an economist at Princeton, has referred to General Motors, Ford and Daimler-Chrysler as "a social insurance system that sells cars to finance itself.''
Manufacturers can compensate for higher health care costs partly by holding down growth in wages. But they have fewer options when dealing with retirees' health benefits. "It would be good for the U.S. economy to get U.S. corporations out of retiree health care," Dr. Reinhardt said.
Large companies seem to be moving in that direction. Last year, only 36 percent of companies with 500 or more workers still offered a retiree medical plan to at least some retirees not yet eligible for Medicare, down from 50 percent in 1993, according to a recent survey by Mercer Human Resource Consulting.
OF course, in Canada and the European Union, higher taxes on citizens pay for comprehensive coverage. This is a trade-off that big business seems increasingly to favor. Both the National Association of Manufacturers and the Business Roundtable, a lobbying group of executives, supported the expensive Medicare prescription drug benefit enacted last summer. Top executives find that having taxpayers foot the bill for older Americans' prescription drugs is more palatable than digging into corporate coffers to pay for their retirees' benefits.
Few business leaders advocate that government provide comprehensive health insurance for American workers not in Medicare - at least not yet. The National Association of Manufacturers would like the system to evolve from one in which employers provide benefits to one in which consumers buy health care.
But, like the prescription drug benefit, such a shift would be likely to transfer the financial burden from companies to American taxpayers. Offering new tax credits is the preferred mechanism for turning insured Americans into health care consumers. And the creation of such credits would force the government to borrow more, reduce spending elsewhere or increase taxes.
Whatever way, we all pay.