What's Ailing Companies: Medical Bills

With fierce competition ensuring razor-thin margins--and limiting companies' ability to raise prices--execs will continue to seek ways to cut expenses. But one area where costs figure to keep swelling is health-care coverage.

While the Labor Dept. recently reported that overall worker pay and benefits are up only 3.7% from a year ago, unpublished estimates show employer health-benefit costs surged an estimated 11.2%. And that pace is expected to accelerate next year. Management consultant Towers Perrin estimates that health-plan costs for large companies will jump 15% in 2003 (chart). That would boost the average total cost to $9,216 per employee with family coverage. Those spiraling costs can quickly subtract from earnings.

The burden won't be felt equally across Corporate America, though. "The biggest hit is being taken by companies that have older workers with more heavily unionized contracts," says Standard & Poor's chief economist David A. Wyss. That includes industries such as manufacturers, utilities, and telecom. Ford Motor Co. (F ) shells out $2.5 billion for health coverage for 620,000 current and retired employees and dependents. One reason for the hefty bill: While the average company picks up 80% of insurance costs, the auto maker pays 100% of the premium for its hourly workers. And for the most part, Ford's hands will be tied until at least next September when the latest contract with the United Auto Workers comes up for renewal.

What's fueling health-care inflation are new drugs and medical technologies, greater utilization of new technology by doctors, and the consolidation of health-care companies, which have more power to force price hikes. Insurers pass along those cost increases and then some. In response, more employers plan to raise co-payments and deductibles and increase the portion of premiums paid by employees. And they have more leverage to do so--with the unemployment rate up to 5.7% in October, valued workers are less likely to bolt for another job.

Still, companies are being forced to find other ways to combat the rise in health costs. More employers, including Bank of America (BAC ), are rolling out free voluntary education-and-treatment services for employees and dependents with chronic conditions such as diabetes. Those employees, on average, account for roughly 75% of claims paid out. The upshot is less emergency care and better work attendance, which means companies can "affect the bottom line while also improving the quality of care," says Blaine Bos, a principal at Mercer Human Resource Consulting LLC. Prescription drugs are another area where companies are looking to save. Ford is working with insurers to encourage doctors to prescribe the same daily dosage in fewer pills.

Insurers, hospital groups, and makers of high-tech medical gear will continue to be the big winners from the rise in health costs. Boston Scientific Corp. (BSX ), which just introduced a new artery stent, forecasts double-digit sales gains for the "foreseeable future."

Eventually, the economy will pick up enough to alleviate the strain that health care is putting on bottom lines. But until then, businesses mired in slow growth will be under increasing pressure to squeeze out productivity gains and hold down hiring. One way or another, rising costs of health care will continue to be a bitter pill for most employers.

By James Mehring in New York

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