Runaway Healthcare Costs - Which Industries Are Most Affected

by: Rick Newman

It started as a dull throb in the economy, with the pain growing sharper. Now there's finally a diagnosis: Runaway healthcare costs are directly harming businesses and their employees.

As just about everybody knows, the cost of healthcare is rising much faster than wages, profits, and most other things in the economy. Healthcare spending accounted for about 11 percent of GDP in 1987; today it's more than 16 percent, and by 2017 it's very likely to be almost 20 percent. We spend more than $2 trillion a year on healthcare—roughly the same amount we spend on housing—and the cost is rising about five times faster than wages or overall inflation. Exorbitant cost is the main reason 47 million Americans have no health insurance—and why President Obama's ambitious plan to expand coverage and overhaul the entire system is in jeopardy.

Somebody has to absorb those painful price hikes every year, and since companies provide the insurance for about 60 percent of Americans, they're the first to get the bill. Some economists believe that businesses simply shift the cost of health insurance to workers, by offering lower wages to compensate for the costly benefit, and to their customers, by charging higher prices to cover the costs of healthcare.

A new study, however, shows that some industries have become chronically hamstrung by rising healthcare costs, with lower growth and employment than they'd have if costs were lower—or somebody else paid them. Researchers Neeraj Sood, Arkadipta Ghosh, and José J. Escarce of the Rand Corp. analyzed the performance of 38 industries from 1987 to 2005 and found that sectors where a high proportion of workers have company-provided health insurance—such as manufacturing, utilities, communications, education, and finance—showed the lowest growth over the 19-year period. Industries where fewer workers get company-paid health insurance—such as agriculture, hotels, entertainment, retail, and construction—grew more.

Since some industries naturally grow faster than others, the researchers isolated other factors that could explain the discrepancy. They also compared U.S. industries with their counterparts in Canada—where the government, not business, pays for healthcare—to see if the entire industry was suppressed because of global trends or just the American slice. Their conclusion: Rising healthcare costs in the United States have directly curtailed growth and employment. And the industries with the most generous benefits tend to be penalized for it. "Industries which provide healthcare to a large fraction of workers didn't grow as fast as industries offering health insurance to a small fraction of workers," says Sood.

The Rand study may be the first to document the impact of rising healthcare costs on business performance, but it reinforces lots of anecdotal evidence. Starbucks (NASDAQ:SBUX) CEO Howard Schultz has complained that his company spends more on worker benefits than on coffee. General Motors has claimed that healthcare expenses add $1,500 to the cost of making a car. Only 59 percent of small firms offer health insurance to their employees, down from 68 percent in 2000. Many business owners say they limit hiring or try to get by with part-timers because the costs of full-time benefits are too high. The prospect that Obama's reforms could actually raise costs on many businesses, to help cover the uninsured, has undermined support for his plan.

Rand quantifies the effect this way: At 2005 GDP levels, every 10 percent increase in "excess" healthcare costs—the amount by which growth in healthcare costs exceeds GDP growth—would cost the economy 120,800 jobs and $28 billion in lost revenues. The researchers caution against extrapolating their data to estimate total jobs lost throughout the whole economy to excessive healthcare costs. But they did some other nifty calculations, showing how employment and output would change in 15 industries if healthcare costs do indeed rise to 20 percent of GDP by 2017, as many economists expect unless there's dramatic reform. (These figures aren't part of the study; Neeraj Sood of Rand provided them to me upon request. Data is from 2004 and 2005, the latest available.)

One startling outcome of the Rand projections is that every one of the 15 industries they analyzed stands to suffer lost jobs and output if healthcare expenses keep rising. Agriculture and forestry, where just 19 percent of workers have company-paid insurance, would shrink the least. Utilities, which cover 83 percent of their workers, would shrink the most. Here's how 15 major industries would fare if healthcare costs swell to 20 percent of GDP by 2017:

One industry, of course, stands to gain plenty of jobs: healthcare. And benefit costs shouldn't be too much of a constraint, since the healthcare industry has one of the lowest rates of insurance coverage. Before long, it seems, everybody in America will either be a caregiver or a patient.

Disclosure: no positions