Group Health Care Cost Increases Fall to Single Digits

Group health-care plan cost increases are slowing dramatically, with the rate of increase in 2004 the lowest in five years.

    This year, group health costs rose by an average of 7.5 percent, to $6,679 per employee, according to a national survey of more than 3,000 employers released by Mercer Human Resource Consulting in New York.

    The 2004 cost increase is the lowest since 1999–when costs increased an average of 7.1 percent–and breaks a three-year run of double-digit cost increases. Cost increases peaked in 2002, when they climbed by an average of 14.7 percent, while they rose 10.1 percent in 2003.

    Total health plan costs for large employers–those with at least 500 employees–climbed 9 percent this year, averaging $6,918 per employee; that’s down from 2003’s 10.2 percent increase. Group health plan costs for smaller employers increased just 5.5 percent this year, averaging $6,359 per employee–a significant drop from last year’s 9.7 percent increase.

    In calculating total health-care costs, the Mercer survey included employer and employee contributions for medical, dental, prescription drug, vision and hearing care and mental health coverage.

    The easing of cost increases, which was much greater than employers had earlier predicted, is the result of several factors coming together, says Blaine Bos, a Mercer consultant in Minneapolis who is one of the authors of the survey.

    For example, smaller fully insured employers benefited from a point in the underwriting cycle that saw both nonprofit and for-profit health insurance carriers cut back premium increases compared with prior years.

    Additionally, plan design changes implemented by employers, especially in the form of greater cost-shifting to employees, reduced the use of services among the employees of small and large firms, Mercer said. As their exposure to much greater out-of-pocket costs has increased, employees have become more judicious in their use of health care services, Bos says.

    Also contributing to a decrease in health-care inflation was the migration of employees out of point-of-service plans and into preferred provider organizations, which tend to be less costly, especially for larger employers.

    Among large companies, 55 percent of employees were enrolled in PPOs this year, up from 51 percent in 2003, while enrollment in POS plans dropped to 11 percent from 14percent. This enrollment trend, in turn, is swaying large employers’ plan offerings. In 2004, 86 percent offered PPOs to employees, compared with 84 percent last year and 75 percent five years ago. Simultaneously, large employers are moving away from HMOs, with 46 percent offering them in 2004, compared with 49 percent in 2003 and 51 percent in 2000.

    The cost-shifting trend shows no sign of decelerating, as just over one-fifth of the surveyed employers said they intend next year to shift more costs for health benefits onto their employees through higher deductibles, copayments or out-of-pocket maximums.

    Furthermore, many more employers are expected to embrace consumer-driven health plans, or CDHPs, in the next two years. While just 4 percent of large employers said they offered a consumer-driven plan this year, 14 percent said they are likely to offer one in 2005, and 26 percent said they are likely to offer a consumer-driven option in 2006.

    “We’re going to see geometric growth, an uptick that is faster than year-over-year straight-line growth for CDHPs in the next three or four years,” Bos predicts.

    Such arrangements feature a high-deductible health insurance plan linked to an account-funded by employers and/or employees-that covers only a portion of the deductible.

    With employees more directly exposed to costs through the high deductible and being able to roll over account balances at the end of the year, the plans give employees a strong financial incentive to use services carefully, CDHP proponents say.

    Investing in disease management programs for chronic illnesses is also becoming increasingly popular among larger employers–the two most common plans are for diabetes and heart disease/hypertension. That’s with good reason: The programs are paying off. This year was the first in which a sizable number of respondents, 31 percent, said they saw a return on their investment.

    Says Bos of long-term cost-management strategies, “We knew that they had a positive impact on quality of life and quality of care, but now we know that they are having a positive impact on financials as well.”

    When asked to predict their group health costs for 2005, employers said they expected inflation to continue to ease, estimating that cost would increase overall by 6.6 percent following plan and/or design changes.

    “I think that’s a very reasonable figure,” says Bos, because the majority of companies at this point have already transacted their renewals process or selected new vendors. “But the question becomes, how long is this sustainable?”

    Other findings in the survey include:

• Forty-two percent of large employers based in the Northeast and 38 percent of employers in the West extend same-sex domestic partner benefits to their employees. By contrast, just 14 percent of employers in the Midwest and 10 percent of employers in the South extend domestic partner benefits.

  
  

• A growing number of large employers are implementing “spousal charges.” In 2004, 7 percent had adopted special provisions that either denied or attached surcharges to health insurance premiums for the spouses of employees who could obtain coverage elsewhere, and another 8 percent of large employers plan to add such provisions in 2005.

  
  

• Nearly all–97 percent–of the respondents believe that the U.S. health-care system is “in need of significant reform,” though they are divided about who should lead the changes.

  
  

• Forty-six percent say that the private sector–employers, consumers and the health-care industry–should initiate the reforms, while 36 percent say the federal government should enact reforms to address problems in the system. In addition, 14 percent favor a federally financed system, such as Medicare, that would cover all Americans.

  
  

From the November 22 issue ofBusiness Insurance. Written by Rupal Parekh.