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Bruce Richmond, 57, always intended to offer health insurance to his 14 employees who manufacture thermal protection pads that go beneath wood stoves or pellet stoves. “My wife and I consider it a moral obligation to try to provide health care to our employees if we can,” he says, even though neither his Chinese nor Canadian competitors are burdened by health care costs.

Richmond’s Hearth Classics plant in Sandy, Ore., is a classic mom-and-pop manufacturing business that’s now staggering under the rising costs of its employee health care plan. Each year, Richmond’s insurance premiums for employee coverage keep mounting: a 17 percent increase in 2006, another 29 percent in 2007. Over the past eight years premiums have increased 138 percent, which far outpaces his ability to raise prices to his customers.

As the price of employee insurance goes up, the level of coverage Richmond can afford for his workers goes down. Last year, Richmond reluctantly asked his workers to shoulder a quarter of their own health insurance costs, a bill that effectively reduces the take-home pay for some of his blue-collar workers by as much as 15 percent. Now, like many Americans, his workers are paying more for less coverage.

Health care costs up, raises down

The rising costs of the health insurance Richmond buys for his workers substantially restricts his ability to give those workers a raise. “It is a pay cut for my employees,” he says, or a raise they didn’t get.

The sharp spikes in health care costs also make Richmond less likely to hire new workers since offering health care “raises the cost of hiring someone substantially,” he says.

As Congress debates reforms designed to expand insurance coverage and slow the rising cost of health care, business executives and economists say the crippling annual increases in insurance premiums are a silent tax on American workers and the companies that hire them. Today the average premium for employer-sponsored health insurance is $13,375 a year for family coverage, with employers paying nearly 75 percent, or $9,860, according to a new study by the Kaiser Family Foundation.

“We can’t sustain this broken system,” says Richmond. “I sure hope something happens.”

“All my clients are struggling to deal with this,” says Matt Swinnerton, a broker who sells health care plans to businesses for the Precept Group in San Ramon, Calif. Rising health care costs, he says, are “the silent killer of compensation for employees.”

Permitting premiums to continue to climb unchecked “is simply unsustainable for families, for businesses, for state budgets and for our national economy,” Vice President Joe Biden said in a September speech to state insurance commissioners in the Washington suburbs.

Jim Sugden, a health underwriter in Denver, says he’s often surprised when employees complain about the high cost of COBRA, a government mandated benefit that allows workers who have lost their jobs to continue getting group insurance rates through their employers. “It’s just the translation of the real cost to you of current health insurance. It just shows you what your employer was paying for your health insurance all along.”

Premiums rise 131 percent; wages, 38 percent

According to the Kaiser study, health insurance premiums across America have climbed 131 percent since 1999—far more rapidly than workers’ wages, which rose 38 percent, or inflation, which rose 28 percent in the same period.

Only 60 percent of U.S. firms offer health benefits to any of their workers, the survey reports. Among those firms, 21 percent said they reduced health benefits or increased cost-sharing because of the economic downturn, while 15 percent reported they increased the worker’s share of the premium.

Now, more workers with health insurance are paying higher deductibles when they receive medical care, the Kaiser study says. In 2006, only 10 percent of workers had to pay the first $1,000 of their medical bills before receiving insurance benefits. Today, 22 percent of workers must pay at least $1,000 out of pocket each year before their insurance starts to pay a portion of their medical bills. A demand for plans with higher deductibles frequently comes from smaller firms, with less than 200 workers.

Clif Bar and Co., a manufacturer of all-natural and organic energy foods, believes in giving extraordinary benefits to its employees, including rebates for buying hybrid automobiles or for installing energy saving appliances at home. Yet even Clif Bar, based in Berkeley, Calif., has been forced to carefully monitor its health care spending recently. Though the company still pays 90 percent of worker premiums, it has boosted the copay workers must contribute when they get health care services, says Claudia Perkins, vice president of human resources.

“By choosing to keep copays low and benefits high, we hope to attract and retain the best employees,” she says. “But at some point, rising costs do become a factor.” One unintended consequence: because Clif Bar offers top-notch benefits, working spouses of many employees tend to drop their own coverage to join the employee’s plan, raising the company’s costs.

In a depressed economy employers try to rein in costs as best they can, notes Sugden, regional legislative chair for the National Association of Health Underwriters. But bosses “are also very sensitive to what employees are paying, so they are increasing worker contributions as a last resort.” Employers know that “wages have been flat because of rising health care premiums,” and that laying off workers has been the easiest way to control rising insurance premiums.

Layoffs triggered by health care costs

Small-business managers say the steep and constant rise in health care costs has other pernicious effects:

* It triggers discrimination against older workers. One employer was shocked to learn his health insurance premium went up 40 percent when he added one healthy worker in her 40s to a small staff of workers in their 30s. “If insuring older workers is so much more expensive,” he asked, “why would any small business hire them over younger workers?”

* It discourages firms from offering health care insurance at all, especially if their direct competitors don’t offer health care.

* It locks in workers to jobs they no longer want, because they fear they won’t be able to duplicate their current health benefits if they leave to join another firm or start their own business.

* It forces employers to think twice about hiring new workers. “My health care costs are so high, I’m reluctant to hire someone,” says Christine Chin Ryan, who develops customized software for energy conservation and efficiency. Ryan says an employee with a family would cost more than $20,000 for health care coverage, “and that would really hit my bottom line.”

Ryan, who is part of a group called the Oregon Small Business Health Care Initiative, says, “We’re concerned about what’s going on.” She says she would like to see a public option—a government insurance plan to compete with private insurers—included in the health care reform mix. Cost containment, she adds, “is a really big issue for us.”

Ryan says she often faces stark choices—the same choices other businesses in her state face: continue current benefits at the increased price; drop benefits completely; reduce benefits; cost-share with employees. Does she cut her payroll to cut costs or reduce the health care coverage she provides her workers?

“Most small businesses think rising costs are outrageous,” she explains. “But those are the choices we face.”

Michael Zielenziger, author of Shutting Out the Sun, writes on the economy. He is based in Oakland, Calif.