Editor's Note: This is the first in a two-part series exploring healthcare costs. See also Consider Quality, Availability Of Health Care In Site Selection which is part 2.

Healthcare costs are still keeping executives awake at night. Healthcare will be the greatest source of cost pressure on companies for the first half of 2007, say more than half of the CEOs polled in the Business Roundtable's latest Economic Outlook Survey.

Healthcare spending, estimates the Center for Medicare and Medicaid Services, represents 16% of total U.S. economic output. And even though healthcare cost increases for U.S. employers moderated a little in 2006, those cost hikes are still climbing twice as fast as inflation and wage growth, reports the Henry J. Kaiser Family Foundation.

In 2007, businesses will pay more for employer-sponsored healthcare. Costs will rise by an average of 7.7%, to $8,340 per employee in 2007, reports a Hewitt Associates analysis of health plans sponsored by 400 major employers. Towers Perrin, likewise, predicts that employers will pay an average of 6% more for employee health benefits in 2007. PriceWaterhouseCoopers says that employers could face double-digit hikes in their healthcare costs in 2007, unless they trim their worker benefits packages.

Business leaders looking for the best place to expand their companies need to include healthcare measures in their site research. "Healthcare is indeed one of the many, many factors that we look at when we are determining where to put a new potential plant," says Daniel Sieger, spokesman for Toyota Motor Manufacturing North America.

"As part of the site location process in an area, our human resources group assesses a variety of healthcare services. For instance, does the area have an established industrial healthcare infrastructure, and are there wellness programs that reach out into the community," adds Sieger.

Toyota's just-opened $1.28 billion plant in south San Antonio, Texas features a Family Health Center that offers nine kinds of wellness and health services -- everything from pediatrics to physical therapy --to the 2,000 Toyota team members at the site, as well as their dependents. The 2,100 employees of Toyota's suppliers who work at the San Antonio facility can also receive needed healthcare at the Family Health Center. Toyota invested $9 million in the 20,000-square-foot Family Health Center. Toyota's San Antonio plant has the capacity to produce 200,000 Tundra full-size pickup trucks annually.

Even smaller manufacturers see the importance of including healthcare costs, quality and availability in the site location equation. "We haven't implemented any significant expansions in a number of years, but if we did, healthcare quality and costs in a community would both be extremely important factors in the plant location process," says Ken Braun, director of corporate human resources, compensation and benefits at Republic Engineered Products based in Akron, Ohio. Republic's 2,500 workers make special bar quality steel that's used in cars, trucks, off-highway vehicles, machinery, and farm equipment.

To help executives in their quest to find the best place to expand their business, the editors of Expansion Management created their Healthcare Cost Quotient (HCCQ) study five years ago. The goal of the HCCQ: to examine healthcare costs, availability and quality in the belief that they varied enough from state to state to qualify as a crucial site location factor.

And healthcare DOES vary from one state or community to another. "Across smaller communities, for instance, there is a wide variance in the availability and effectiveness of healthcare and resources, and companies should not assume a location has certain capabilities (or conversely, assume a place does not) without doing the field work," says Mark M. Sweeney senior principal at McCallum Sweeney Consulting (Greenville, S.C.). His firm offers site location, incentive negotiation and economic development consulting services globally.

The 2007 Healthcare Cost Quotient is the latest in our long line of Expansion Management "Quotient" studies, which include the Education Quotient, Logistics Quotient, Quality of Life Quotient, Legislative Quotient and Knowledge Worker Quotient.

For the 2007 HCCQ, states were ranked on a one- to five-star rating system. Among the ten states that achieved five-star status, eight are in the Midwest. Among the 11 four-star finishers, four are in the Midwest. (For the rankings of all 50 states in .pdf, click here.)

The Major Categories

The Healthcare Cost Quotient is based on a wide variety of data that is grouped into five major categories: healthcare facilities, healthcare providers, health insurance costs, healthcare provider visit costs, and malpractice costs.

Cost-related factors were given the greatest weight, given the fact that the study looks at healthcare costs from the employer's perspective.

Out-of-pocket costs for worker health insurance may be the most important measure for employers in the equation. Therefore, we went to the Agency for Healthcare Research and Quality (AHRQ), a part of the U.S. Department of Health and Human Services, and used its Medical Expenditure Panel Survey as a guide to employer health insurance costs. We used statistics from AHRQ's Insurance Component Summary Tables (Employer-Based Health Insurance Data section) as our chief source.

States were ranked on all of the following: the average amount employers paid for family coverage per enrolled worker, the average total employee contribution for family health coverage, and the average total family health premium per enrolled employee. The AHRQ data was released in July 2006.

The 2007 HCCQ also included U.S. Census Bureau data on statewide percentages of persons not covered by health insurance. No question about it -- businesses and individuals who have health coverage are paying the costs of providing treatment to the uninsured. One expensive cause of escalating healthcare costs in the U.S. is charity care for the uninsured that healthcare systems pass on in higher rates to businesses and insured consumers.

Yet another measure used in the 2007 Healthcare Cost Quotient: hospital expenses per capita for persons admitted to hospitals. Data, based on community hospital admissions, came from the American Hospital Association's (AHA) 2005 Annual Survey of Hospitals.

To get a feel for the typical cost of a visit to a healthcare provider, we relied on healthcare cost data for the states from the ACCRA Cost of Living Index (third quarter, 2006).

We ranked states based on the ACCRA Index average cost data for patient visits to each of the following: doctor, dentist and optometrist. The Council for Community and Economic Research (http://www.c2er.org) produces the ACCRA Cost of Living Index.

With skyrocketing medical malpractice premiums in the news on an almost-daily basis, we used three key malpractice measures in our state rankings: average medical malpractice premiums paid per doctor, average malpractice settlement costs per doctor, and how states stack up in the American Medical Association's (AMA) latest Medical Liability Crisis rating.

Sources for this malpractice information included the 2006 Insurance Fact Book from the Insurance Information Institute, the U.S. Census Bureau, the AMA, and the Kaiser Family Foundation's State Health Facts web site.

Malpractice litigation costs have a big impact, says Maria Ghazal, director of public policy at the Business Roundtable (Washington, D.C.): "Businesses absolutely should focus on the availability and quality of healthcare for employees when they expand. This is a key issue related to litigation costs; in many states we have a provider access issue because medical malpractice rates have risen so much due to litigation that there is a shortage of certain specialists. That is why we need federal medical liability reform legislation."

The Business Roundtable is an association of chief executive officers of major corporations with a combined workforce of more than 10 million employees and $4.5 trillion in annual revenues.

For the 2007 HCCQ, we tried to answer the broad question most employers ask themselves: Are the healthcare facilities adequate at a prospective location for their workforce?

In addition to considering such basic data as the number of hospital beds per 100,000 population, and number of community hospitals per state, we also considered the number of top-notch healthcare facilities from U.S. News & World Reports' Best Hospitals 2006 list. The American Hospital Association provided the bed and hospital counts as well as the hospital expense per admission data.

To get an overall feel for the availability of healthcare providers in the states, the 2007 HCCQ looked at such yardsticks as the number of physicians and nurses per 100,000 population. Source of the data was the U.S. Census Bureau's State & Metropolitan Area Data Book 2006.

Businesses looking to expand may want to investigate the number of holistic medicine providers at prospective sites. Some of these providers offer the following treatments: acupuncture, yoga, meditation, chiropractic, and massage therapy.

"Do not assume that your workers want standard health coverage; maybe they want a different sort of package," says Nan Andrews Amish, a management consultant who describes herself as a Business Healthcare Contrarian. "Smart employers are starting to offer coverage that is more about health and less about disease. International and multi-ethnic workplaces especially appreciate these approaches that tend to cover holistic services more than conventional Western approaches."

As we close, one daunting statistic from McKinsey & Company, the management consultants: by 2008, the average Fortune 500 company will be spending as much annually on health benefits as it earns in profits.

Thank goodness, executives at expanding businesses smell the coffee. "In the most recent Boyd Company leading indicator poll in which we ask our clients to rank certain site location variables influencing their decisions, the cost and quality of local healthcare services jumped in the poll from 17th position a year ago to 11th in the current one. This was the largest increase of any factor," says John H. Boyd, founder and president of The Boyd Company Inc. Boyd's firm, based in Princeton, N.J., provides independent site selection counsel to leading North American and overseas corporations.

Additional information can be found here.

Michael Keating is a senior research editor for Expansion Management. He can be reached at mkeating@penton.com