BenefitsEmployee EngagementMulti-process HRSourcing

EDITOR’S NOTE:Outsourcing and Offshoring: Fallout from the Healthcare Tax

GM learned its lesson, but will the rest of us catch on to a disaster in the making?

by Andy Teng

There was a time when I would have scoffed at the notion that outsourcing HR necessarily led to the offshoring of jobs. Fact is, few of the jobs lost to HRO so far have ended up in India, Eastern Europe, or elsewhere. True, some leakage to offshore centers occurred, but the majority of the cuts was just downsizing from an inefficient HR model.

More recently, however, I’m wondering if we will soon see a big wave of jobs being offshored, this time with more of an impact on American workers. And this prediction has less to do with the usual offshoring fears. Just ask the guys in Detroit.

As you might have heard, healthcare costs saddled an extra $1,500 onto each one of GM’s cars in 2005. Its total healthcare bill for that year (the latest year for which the automotive giant provides data) was a staggering $5.3 billion—more than any other private employer on earth. In an industry besieged by ultra-efficient foreign competitors, that’s a handicap difficult to overcome.

Okay, you’re thinking, where’s the parallel? After all, HRO is a service industry, automotive is manufacturing; GM is guided by union agreements but few HRO providers have unionized workforces; American automakers have failed to design adequately for today’s consumers’ tastes, while the HRO industry is pretty much in tune with its clients.

All of these considerations matter little to an employer looking at bottom-line costs. In 2005, national health spending rose 6.9 percent, according to the National Coalition on Health Care. That’s twice the rate of inflation. The country’s total bill was approximately $2 trillion—that’s right, with a “T”—or about $6,700 per person. As a percentage of GDP, it accounts for 16 percent. Further, predictions are that it will account for 20 percent of GDP by 2015.

In comparison, many other industrialized nations spend a significantly smaller part of their GDP on healthcare (most Western European nations with their socialized systems are only around 10 percent).

In nations where socialized medicine is available, employers essentially get a subsidy. In other emerging markets, healthcare benefits often are not offered as a term of employment—further giving them a competitive edge. (China spends a meager four percent of GDP on its one-plus billion citizens.)

Think of the U.S. healthcare burden as a large tax. We Americans get pretty upset about any tax, and this one is rising at twice the inflation rate. Any other tax growing this quickly would get ordinary citizens riled, feed the airwaves of local talk radio, and make politicians sweat even more under the collar. But because it’s generally not regarded as a tax, it won’t play in Peoria. I don’t know about you, but I might just have more in my pockets if my employer didn’t have to cough up so much on healthcare.

The impact on offshoring, of course, is that this national tax on employers creates a greater cost gap between a worker here and one in India. Not only are wages significantly lower abroad, but the benefits also are minimal. Healthcare systems in developing nations such as India and China are woeful, but that’s not top-of-mind for HR leaders when comparing the costs of service delivery in Mumbai with those in Memphis.

While most of us prefer that outsourced positions stay onshore, the business case is leaning the other way. It’s difficult to make a compelling argument for keeping jobs here when healthcare costs continue to skyrocket and erode American firms’ ability to remain competitive.

What’s the answer? I don’t know. But I do know that if we continue to pay only lip service to the healthcare crisis, it will lead to a few major consequences: productivity will drop because more workers won’t be able to afford care; the ranks of the uninsured will take a toll on our hospitals and other healthcare safety nets; and the allure of low-cost, overseas providers will become more appealing, further shifting jobs abroad.

There was a time when equating outsourcing with offshoring seemed like a leap in logic, but I’m not certain any more. What I am more certain of is that if we, as a nation, continue to ignore the healthcare time bomb, offshoring won’t be so much a choice as it will be a necessity.

Tags: Benefits, Engaged Workforce, HRO Today Global, Multi-Processed HR, Sourcing

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