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December 11, 2000

Consumers Facing Sharp Rise in Health Costs
By Milt Freudenheim, The New York Times

Health Care Costs Give Economy Heart Attack ... Weiss comments

WASHINGTON - Consumers across the country will face double-digit increases in their health care costs starting next month, reflecting the biggest surge in medical inflation since the early 1990's. The increases will show up in larger deductions from paychecks and higher deductibles and payments for care, especially prescription drugs.

Employers learned earlier this year that their health care premiums would be increasing between 10 and 30% in 2001. Most companies across the country are absorbing the majority of the hefty increases, hoping to retain important employees in a tight labor market, but they are sharing the burden with workers. And at some companies, employees are paying a growing share of the costs.

"If the double-digit increases continue and the economy turns down, that could eventually drive the uninsured to 50 million or higher," said Jack Meyer, president of the nonprofit Economic and Social Policy Research Institute in Washington.

"My concern is that when costs go too high, there will be a certain number of companies and employees who will say they can't afford it," said Marshall Abrahams, president of Desks Inc., a Denver office supply firm with 50 employees.

Employers facing double-digit premium increases are "starting to get panicky," said Janet Trautwein, policy director of the National Association of Health Underwriters, an insurance agents group. "Rates are going up dramatically in some parts of the country. Some employers have reduced their contributions and some have changed the benefits" to make them less costly, she said.

Over all, employees of large companies will pay 18% more, or $1,401 on average, in 2001, according to a Hewitt survey of 350 employers with six million workers and dependents. The employers' health care costs will rise 9.8% to $4,026 per employee. Combined costs for these companies and their workers will rise 17%, Hewitt said.

Employers have been paying most of the increase in health care costs over the last two years in order to retain workers in a tight labor market. But if the economy slows, that could change.

"The American public is in for a shock when the recession comes," said Jon R. Gabel, vice president of the Health Research and Educational Trust, an independent research affiliate of the American Hospital Association. "They have no idea how much health care costs have increased over the last five or six years."

"This is a watershed time for us," he added. "Either we, as an industry, recognize these cost trends and make the right decisions," or the customers will drift away, going without insurance or trying Internet- based alternatives to the managed care companies.

This is yet more evidence of how inflation will accelerate as the economy drifts into recession. Health care costs have been rising meteorically over the past five years, but employers hadn't been able to pass those costs onto employees because of a tight labor market.

Plus, in good times, companies are less pressured to increase employees' share of the costs because the company stock is performing well, company earnings are high and the future looks bright. But, when the economic horizon clouds up, companies panic and rush to cut costs as profits dwindle and their stock slides.

So now, employers will face skyrocketing health care costs at the same time that their promise of job security disappears, the company stock loses value, and they can't offer company-issued stock options to attract employees. This can only heat up wage pressures, especially in high-tech industries where options have been shredded and highly trained employees are hard to come by.

Higher wages will likely shift inflation -- already fueled by rising gas prices -- into overdrive. This will give the Fed little choice but to raise interest rates in an effort to keep a lid on inflation, just when all the wizards on Wall Street are loudly predicting a rate cut. Fasten your seat belts -- the road ahead is looking very bumpy indeed.

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