The Economic Impact of Health Care Costs

It has been reported

General Motors Corp. and the United Auto Workers union appear headed for a historic clash as spiraling health care costs seemingly threaten the very survival of the world's largest carmaker.

GM reported Tuesday it lost $1.1 billion in the first quarter, its largest quarterly loss in more than a decade, and it cited the cost of providing health coverage for its workers and retirees as a main culprit.

The key point here is that the cost of health care threatens to drive one of the nations largest companies out of business. Hewitt Associates predicts an annual increase in the cost of health care to employers of about 10%. To be fair, that is the lowest rate of growth since 1999. But that rate is about 3 times the growth rate of wages. It is also worth noting that out of pocket expenses are growing faster (11.5%), reflecting that companies are shifting more of the cost to employees. Hewitt estimates that these increased costs will consume about one quarter of an employee's salary increase.

As I argued last year, the skyrocketing cost of health care is a serious economic issue.

Providing insurance to new employees is a significant cost for an employer to bear, and so becomes a disincentive to hire people. I believe this is one of the reasons unemployment has stubbornly refused to fall back to the levels seen in the Clinton years when insurance costs were much lower. It is much more costly for companies to hire people today relative to the boom times of the 90's, so employers are less inclined to do so. As costs continue to explode, unemployment will increase, dragging the economy down. Shifting the cost more to employees, while helping the employer, will reduce the amount of disposable income in the marketplace, resulting in a reduction of spending and consumption, again dragging the economy down.

And still the president and Congress do nothing.