Health Care Costs Hurt Profits

Employees are facing a double whammy when it comes to health care costs: Many companies are likely to ask workers to pay more for their insurance while rising health care costs means companies may dole out lower raises.

Half of large U.S. companies said that increased health care costs have contributed to slower profit growth and as a result more than 75 percent may ask employees to bear an even greater share of the cost, according to a new study by PricewaterhouseCoopers released Monday.

Twenty-five percent of the companies said double-digit health care cost increases may force them to lower wage hikes for employees and one in five expects to slow hiring of new permanent workers in the year ahead. The executives at the 150 companies surveyed said per-employee health care costs had risen 12 percent over the last year and were expecting an 11 percent increase in the coming year if no changes are made to the plans.

While various indicators may point to improvement in the economy, health care costs are squeezing companies' ability to hire more workers and raise pay, said PricewaterhouseCoopers consultant Barry Barnett. Right now, he said between 12 percent and 15 percent of company's payroll costs stem from health care, up from around 8 percent five years ago.

"Health care costs are the reason job growth isn't where the Bush administration would like it to be," Barnett said.

For example, in June the economy saw the addition of 146,000 jobs — less than the 195,000 jobs economists were predicting.

Barnett said that while the auto industry has been vocal about health care costs dragging on profits, the problem extends to many sectors with a large unionized work force.

Employers seem conflicted over the best ways to reduce costs. Seventy percent said that requiring employees to pay higher deductibles would lead to a reduction of discretionary health care spending. But 60 percent said that would cause employees to defer seeking necessary care and risk long-term problems.

More than 80 percent of employers said they believed the most promising option for reducing health care cost increases was to provide financial incentives for employees to live a healthier life style. Still, only 48 percent of companies said that employees with unhealthy habits such as smoking should be responsible for paying a larger share of their benefits.

By Theresa Agovino