Employer Medical Costs to Jump Nearly 20 Percent in Next Two Years

Stop us if you’ve heard this one before.

The cost of providing health care coverage for workers is expected to rise substantially next year. According to research conducted by the PricewaterhouseCoopers Health Research Institute, employer medical care costs will increase by 9.9 percent in 2008. The auditing firm also expects a 9.6 percent bump up in medical coverage costs for businesses in 2009.

Those increases should worry employers, who have seen the growth rate of medical coverage costs slow down in recent years.

“While the continued slowing of medical cost growth is welcome, the fact that the rate of growth may no longer be declining as sharply is worrisome,” said David Chin, leader of the institute. Chin said that rising inflation could easily cause cost increases in medical care, which already exceed the overall inflation rate, to surge.

The reasons for the projected increases? The boom in the health care industry has triggered the construction of replacement facilities, the expansion of private hospital rooms and the development of outpatient venues. The cost of construction is adding to the overall medical costs for employers, PricewaterhouseCoopers found.

Underfunding of public medical insurance programs is also adding to the bulging health care spending by employers. According to a report from the Employee Benefit Research Institute, under the current law, Medicare updates to physician payment rates are projected to be negative each year from 2009 to 2016—this is in spite of the fact that health care costs are expected to increase.

Employers, who are already struggling to manage the cost of providing health care to workers, are expected to continue the trend of cost-shifting some or all of the cost of paying insurance premiums to workers, the study said. While companies have tried to control the cost of premiums by switching to lower-cost plans or increasing co-payments or deductibles, Michael Thompson, principal in PricewaterhouseCoopers’ global human resources services unit, expects those strategies to decline. About one-third of the employers surveyed said they expected to increase cost shifting in their medical plans for 2009.

The report also said employers will try the relatively new strategy of relying on prevention and disease management programs to keep premiums lower, rather than shift more costs onto workers.

“Increasingly, employers are adopting plan designs that help workers ‘earn’ discounts or bonuses for behavior that keeps them healthy, productive and engaged,” Thompson said.

Filed by Matthew Scott of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.