The Healthcare Cost Crisis: Causes and Containment

By Luthans, Fred; Davis, Elaine | Personnel, February 1990 | Go to article overview

The Healthcare Cost Crisis: Causes and Containment


Luthans, Fred, Davis, Elaine, Personnel


The Healthcare Cost Crisis: Causes and Containment

Rising healthcare costs have reached crisis proportions. We are currently spending 11.4% of our gross national product (GNP) on healthcare. This means that, on average, more than 11 cents of each dollar spent is used to pay for physician and hospital charges, prescriptions drugs, and other healthcare needs. Total expenditures amounted to more than $500 billion in 1988 and are expected to reach $542 billion in 1989 - or more than $1,500 for every man, woman, and child. If that amount were reported as a GNP, it would represent the eighth-largest nation in the world. Healthcare has become our third-largest business.

Employers bear much of these staggering costs because approximately 85% to 90% of all health insurance is purchased through group plans, and the HR department is asked to manage these plans. Because such costs are escalating, companies are being hit with steep increases in health insurance premiums; projections for the near and distant future look similarly bleak.

Most estimates report that health premiums increased 20% to 30% in 1989, and the same is seen for 1990. These increases are an astonishing three times the inflation rate. Things are moving so fast that many insurers are refusing to guarantee their rates for even 12 months. Each Fortune 500 company spends over $100 million a year to provide employee medical coverage, and the cost of medical benefits to the average employer is 13% of payroll, compared with less than 5% a decade ago. This all translates into considerable problems for both companies and HR departments.

These costs are obviously beginning to have a tremendous impact on companies' profits and competitiveness - not to mention their HR professionals. HR people are caught between top management edicts to slash rising health benefits costs and stiff resistance from employees, who view healthcare as a basic right. The resulting tension is straining employer-employee relations.

What can HR professionals do to meet this enormous challenge? First, they need to understand why the costs have suddenly escalated and then to focus on alternate methods of containing them.

Factors Contributing to

Escalating Costs

Several factors contribute to the present healthcare cost crisis. And many of these factors are closely related. Below, we review those that have had the greatest impact:

INCREASING LABOR COSTS

Healthcare workers have been underpaid for years; only recently have they begun to catch up. Healthcare is a highly labor-intensive industry, with more than 75% of expenditures going for payroll and benefits. Nursing wages have lagged the most, and - making matters worse - five years after they enter the profession, nurses' salaries tend to flatten out. Thus many nurses leave to work in other areas of healthcare or to pursue other kinds of careers. Healthcare providers have had to raise nursing salaries in an effort to stop the exodus. They are forced to offer very competitive salaries and benefits packages in order to attract and keep nurses. Recruitment bonuses are being given in some areas of the country. Yet the nursing shortage persists - and many experts expect it to continue and even worsen in the coming decade. What's more, competition and resulting costs for other types of healthcare workers are also high.

THE HIGH COST OF MEDICAL

TECHNOLOGY

Physicians and medical researchers are eager to have the newest available equipment, both to provide the best possible care to patients and to maintain a hospital's image as modern and competent. Teaching hospitals are particularly subject to pressure to purchase state-of-the-art technology, because many of the physicians associated with these hospitals are pioneers in their fields and need the most advanced equipment to continue their work. Hospital administrators also know that most doctors have multiple hospital privileges, and in order to keep the good ones at their hospital, they must provide the latest and best technology. …

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