Critical Condition

Executives at General Motors are deeply concerned about a rising cost of doing business. Escalating wage demands perhaps, or increasing prices for steel? No, the problem has nothing to do with making cars. What really alarms GM is the company's health insurance plan. During the first nine months of last year, GM spent more than $2 billion on medical care coverage for its 2.3 million employees and retirees and their dependents. In the same period, the profits earned by the giant industrial firm were $2.7 billion. And while those earnings were only marginally higher than they had been a year earlier, the company's health care bill grew about 30%.

GM's dilemma dramatically illustrates a mounting disaster that threatens all of corporate America. After years of trickling increases, insurance premiums that companies pay for group health plans are suddenly swelling at flash-flood rates. The Health Insurance Association of America, an industry trade group, says commercial health insurers are boosting their premiums about 20% this year, vs. just 4% in 1987. Some group health plans have been hit by price increases as high as 70%.

The premium hikes are part of a general surge in costs that is hitting everyone covered by health insurance. On Jan. 1 the Medicare premiums paid by elderly and disabled Americans jumped 38.5%, from $17.90 to $24.80 a month, the largest increase since the program was started in 1966. At the same time, Blue Cross and Blue Shield premiums for federal workers rose 38%.

These increases have stunned benefits managers, who believed health costs were finally starting to moderate. After all, medical care inflation, which was running at double-digit levels in the early 1980s, was just 5.8% last year. That was not much more than the 4.4% rise in the Consumer Price Index for 1987.

What went virtually unnoticed until now, however, was that while the pace of price increases was slowing, the number of medical claims filed with insurance companies was growing ominously, pushing up overall expenditures faster than expected. The total medical bill for U.S. health care rose last year about 10%, from $458 billion to more than $500 billion, or 11% of the gross national product. Those costs are expected to climb an additional 15% this year.

The new hikes in health insurance premiums are even larger than the current rate of growth in medical spending, in part because insurers base their premiums on past trends. Insurers concede that several years ago, actuaries underestimated the part that nonhospital care and increased utilization of medical services would play in pushing up health care expenditures. The increases now taking effect are designed to make up for rates that were too low for the past two to three years. Industry economists say rates should rise more slowly starting next year.

The explosion in medical premiums hits business especially hard. Except for Government workers and those covered by Medicare and Medicaid, most Americans are insured against medical expenses through private employers. To provide that coverage, U.S. companies will pay $130 billion in insurance premiums this year, up from $110 billion in 1987.