Improving economics, greater revenue and higher profits have done wonders for construction industry firms in the last couple of years. Now, a new villain threatens to take it all away–the climbing cost of employee health care.

Covering workers’ medical needs without breaking the bottom line has become almost as tough for engineers, contractors and union leaders as the construction projects they design, build and manage.

National surveys trumpet huge cost increases in drugs and hospital visits, in premiums and co-pays for workers and in overall costs that employers now subsidize to fulfill a traditional obligation to their inhouse work forces and to their collective bargaining agreements. "Each year we age, the cost of drugs goes up 3%," says John Fortin, Atlanta-based national practice leader of health care cost management for insurance broker Willis Group Holdings. "Venture capitalists are pouring money into health care. There’s new technology but it’s extraordinarily expensive."

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A survey last March by industry management consultant EFCG Inc. of 80 design firm CFOs shows how the medical cost bite is about to hit bone. Respondents report that in 2005, health care made up 9% of their total labor costs. "Medical costs are half the profitability of this industry now," says EFCG President Paul Zofnass. The Construction Labor Research Council, which tracks union agreements, says the $4.82 average hourly contribution for health and welfare in 2005 is 43.5% higher than it was five years ago, whereas wages have risen only 17% in that time. "The problem is pervasive," says CLRC Executive Director Bob Gasperow.

The high costs have employers and employees in a quandary. Shifting more financial responsibility to employees comes at a time when staff is harder to recruit and retain. Firms and unions, already worried that workers and families are underinsured or going "bare," are loath to exacerbate the problem. "The decision was pretty clear to keep a rich benefits program," says Lindy Morgan, corporate benefits director for Skanska Building Co., Parsippany, N.J.

Balancing work-force and bottom-line demands in health-care management is one of the industry’s biggest challenges and participants are crafting new solutions by reexamining benefit plans, sharing costs and lobbying insurers and Congress harder for change. "We have two key prerequisites for success in the industry–our people and our finances," says Ralph Peterson, chairman of CH2M Hill Cos., Denver. "This is the intersection."