Please understand, I'm not saying you should drop your own ideas for addressing the health care situation. Most of them we support. Health savings accounts certainly have the potential to help small businesses like mine. Because employees would be using their own pretax dollars to pay for medical expenses, they would no doubt become smarter consumers of health care services, which is good for everyone.
Most of us in small business are also behind your effort to curb medical malpractice suits through tort reform. It's just not enough. The $24 billion that the health care industry doled out in malpractice awards in 2002 represented less than 2% of its total costs for the year, according to the Congressional Budget Office. Measures like capping attorneys' fees and limiting awards will help reduce health care costs in some areas, but we need to do more.
As for allowing small businesses to band together in associations that would let them qualify for discounted health benefits, it sounds like a good idea, but be careful. There's a danger that associations would favor companies with a young work force and reject those with older employees -- with the result that some people who have coverage now might lose it. And before you spend a lot of your political capital on getting a bill for association plans through Congress, you might want to check out how many additional people would actually be covered. I understand that's a matter of some debate.
Nevertheless, these are steps in the right direction. You can help us most, however, by using your considerable clout as President to get the health care industry to bring its cost increases under control.
Lawsuit Nightmare
Medical malpractice is not the only area in which we need tort reform, as I'm sure you're aware. Lawyers on contingency fees have turned all kinds of litigation into a nightmare for small businesses. In my company, it got to the point where we'd get a call from the same lawyer every time we let one of our employees go. We were becoming the guy's meal ticket, and we had to put a stop to it. So a year and a half ago, we began requiring our employee-owners to agree to arbitrate any disagreements that might arise. Now, rather than going to court with every problem, we hire arbitrators, who are paid by the hour, to work out compromises. With no 30% or 40% contingency fees to be had, the lawyers have stopped calling, and our annual spending on legal fees, lawsuits, and claims has plunged from $414,362 in 2003 to $97,169 in 2004.
With arbitration, moreover, everybody has to be reasonable. For instance, one of our employees recently filed a complaint about another employee who had allegedly made an inappropriate remark. We don't condone such behavior, and we put the offender on suspension. During the arbitration process, we got the sense that the employee who had complained wasn't happy being at the company anymore. We offered him a 90-day severance package. He asked for three years of severance pay. When we refused, he decided to come back to work.
I'm not saying that all lawsuits are frivolous. Of course, some employees have legitimate complaints, and some employers don't treat people as they should. But the vast majority of business owners try to do the right thing, and they shouldn't have to pay because of a few bad apples. We've cut down on employee lawsuits by switching to arbitration, and we urge other business owners to do the same. But we could all use some help from the government in terms of tort reform.
The Challenge of Foreign Competition
It's a fact of life that American business owners in general -- and manufacturers in particular -- face stiff competition from countries with dramatically lower costs than we have. In Mexico, for example, someone can remanufacture one popular type of engine in 20 hours for $2.15 an hour, including labor and all the invisible overhead costs, such as rent, electricity, accounting, and health benefits (if the company provides them). In Springfield, it costs us $40 an hour to make that engine, partly because the invisible costs are much higher. So we're spending $800 per engine, while a Mexican remanufacturer can do it for $43. That's a $757 difference. We think it's only our exceptional quality that saves us.
But with that kind of cost differential, I can't criticize any U.S. business owner for thinking about setting up shop overseas. We may eventually be forced to consider it too. If we're pushed to that point, we wouldn't shut down any of our Springfield factories, but we might start doing some business in Mexico to bring down our average cost. There are simply no cheap alternatives this side of the border. Although in theory we could reduce our invisible costs by not offering health insurance, I doubt that anybody would want to work here if we did. Besides, our goal is to improve the quality of life in our community, not to make it worse. We can continue to do that and remain competitive by manufacturing both here and abroad. It doesn't have to be all or nothing.
That's the message I think you can convey better than anyone else to company owners who are being hurt by competition from countries with much lower costs. Erecting trade barriers certainly isn't the answer. Look what happened in 2001 when you put tariffs on steel imports. It hurt a lot more people than it helped by driving up steel prices for American builders and manufacturers. Instead, you should be the teacher. Explain the issue to company owners. Encourage those who are thinking about shutting down entire factories to keep some work here and transfer a smaller portion abroad. That way, they'll reduce their costs without devastating their communities by eliminating thousands of jobs.
Tax issues are important, but it's the continued escalation in the invisible costs that's killing us these days.
The Toll of High Energy Costs
I'm sure that boosting U.S. oil production will be one of your priorities this term, as well it should be. High energy prices are a huge burden on companies like ours -- and everybody else, for that matter. In the past, however, I think we've gotten sidetracked by focusing too much attention on issues like drilling in Alaska, while we've all but ignored other major obstacles to increased oil production, such as the shortage of domestic oil refining capacity. That's a direct result of the regulations we've put on oil refineries. As you may be aware, no new refinery has been built in this country since 1976. Why? Because it would cost more than $2.5 billion to build one from scratch that meets our stringent emissions standards. As it is, even if you succeeded in getting more oil pumped in Alaska, we might not be able to refine it, meaning that we'd have to continue living with high gas prices -- and suffering the consequences.
