Healthcare to help ditch the stock market:
Accelerating Health Benefit Cost in 2000
Has Employers Bracing for Double-Digit Rise in 2001
By: Stephanie L. Poe
wmmercer.com
Employers taking steps ranging from timid to draconian.
New York - 12 December 2000 - In 2000, employer-sponsored
health benefit cost rose 8.1%, for a third straight year of increases
more than double the rate of general inflation. Average cost per
employee rose from $4,097 in 1999 to $4,430 in 2000, according to
a new survey of over 3,300 employers released today by William M.
Mercer, Incorporated.
While a source of concern, the increases of the past three years
(6.2% in 1998 and 7.3% in 1999) did not prompt much cost
management activity on the part of employers. Focused on attracting
and retaining staff in a tight labor market, most employers simply
absorbed the higher cost in 2000. The notable exception was a jump
in employers terminating retiree medical plans - a cost-cutting
measure that does not affect the active employee population, at least
in the near term.
But next year will be another story. The average increase expected
for 2001 is 11%, and some employers (13%) face increases of 20%
or more. With cost escalation of this magnitude, many employers -
though not all - are taking action.
"Attraction and retention of employees is still a big issue," says
Blaine Bos, a Mercer health care consultant and one of the study's
authors. "But in companies where shareholder demands and the
pressures of global competition are driving the bus, controlling
runaway expenses takes priority."
Cost shift to employees, minimal in 2000, will begin in earnest in
2001
When asked in 1999 about their plans for the upcoming year, only
21% of employers said they would increase employee contributions
and only 9% said they would shift cost to employees through other
cost-sharing provisions (such as deductibles, copayments, and
out-of-pocket maximums). But in 2000 these figures doubled: 40%
of employers say they will increase contribution levels in 2001 and
17% will raise deductibles, copayments, or out-of-pocket
maximums. Large employers (500 or more employees) are the most
likely to shift cost - 58% will raise employee contributions and 26%
will shift cost through other cost-sharing provisions.
Prescription drug cost played a big part in the cost increase in 2000,
with employers reporting an average drug trend of 17.5% at the last
renewal of their largest medical plan. (Drug cost rose 11.5% in
1998 and 15.2 % in 1999.) With drugs now accounting for about
14% of total medical plan cost, nearly all employers require
employees to pay a portion of the cost of each prescription.
However, employee copayments have not kept pace with cost
increases. Among employers offering a retail prescription card plan,
in 2000 average per-prescription employee copayments only rose
from $7 to $8 for generic drugs and from $14 to $16 for brand-name
drugs. Some employers are attempting to control costs by instituting
"three-tier" copayments, in which employees pay yet a higher
copayment for brand-name drugs not on their plan's formulary (a list
of preferred brands of drugs that the plan buys on a discounted
basis). A fourth of all employers (26%) had a three-tier copayment
structure in 2000, with an average copayment for a non-formulary
drug of $28.
Significant drop in employers offering retiree coverage
Some employers took a more radical step to curb health care
spending in 2000. While employer-sponsored medical coverage for
retirees has slowly eroded throughout the 1990s, in 2000 the number
of large employers (500 or more employees) offering medical
coverage for pre-Medicare-eligible retirees fell from 35% to 31%,
while the number offering coverage for Medicare-eligible retirees
fell from 28% to 24%. These figures refer to continuing plans - ones
that will cover all future as well as current retirees. An additional
5% of large employers maintain plans covering current retirees only.
While a handful of employers (1%) provide retirees with a subsidy
to purchase coverage on their own, most do not.
The decline in the percentage of employers providing retiree
coverage likely comes both from employers terminating plans and
from new organizations choosing not to include it in their benefit
offerings. It's easy to see the downside to offering retiree medical. In
2000, employers reporting two years of retiree costs experienced a
10.6% increase, on average, in the cost of covering a
pre-Medicare-eligible retiree (to $5,537 per retiree) and a 17.0%
increase in the cost of covering a Medicare-eligible retiree (to
$2,319). The increase for Medicare-eligible retirees tracks closely
with the increase in prescription drug cost. Medicare does not cover
prescription drugs, and most retiree medical plans for the
Medicare-eligible population are designed to fill this gap.
But Mr. Bos cautions that there's a downside to not offering retiree
coverage as well. "Without a retiree medical plan, employees wait
longer to retire - which may delay career advancement for younger
employees. And those employers trying to attract experienced,
mid-career employees may find the lack of retiree coverage hurts
them," says Mr. Bos.
The median retirement age is 61 in organizations that offer retiree
coverage to pre-Medicare-eligible retirees, and 64 in organizations
that don't.
Chip Kerby, an attorney in Mercer's Washington Resource Group,
says recent court cases may discourage more employers from
offering coverage to retirees. "We expect retiree health coverage
will surface as a significant issue in the next Congress," he says.
HMO cost rose most sharply in 2000
For the first time in seven years, HMO cost rose more sharply than
PPO cost in 2000 - 9.6% compared to 7.7%, respectively. In an
HMO, participants may use only network doctors, while in a PPO (a
preferred provider organization) they may see any doctor, although
there are usually financial incentives to use "preferred" providers.
Further, cost rose 10.1% in point-of-service (POS) plans, which are
similar to HMOs except that participants may seek care not
authorized by a primary care physician and still receive some level
of coverage. At $4,110 per employee, POS plan cost was higher than
PPO cost in 2000.
"HMOs promised to bring cost increases under control," says Mr.
Bos, "but now we're seeing cost going up faster in HMOs than in
less-managed PPO plans. Is this reversal part of a period of
adjustment, with HMOs making up for years of under-pricing, or are
HMOs simply not capable of managing cost by managing care,
despite all their administrative machinery?"
Many PPOs now include "managed care" features such as disease
management programs, which provide comprehensive, integrated
care for individuals with chronic disease. Disease management
programs are found in 52% of PPO sponsors' plans, compared to
65% of HMO sponsors' plans.
Some change in enrollment trends seen
Still, rising health costs may be helping HMOs gain members.
Averaging $3,713 in 2000, HMO coverage costs about $300 less per
employee than PPO coverage, at $4,032. Following three years of
flat or sinking enrollment, HMO enrollment drifted up from 30% of
all covered employees to 32% in 2000, and enrollment in POS
plans, which had fallen over the past few years, held at 16%. After
five years of solid growth, PPO enrollment was essentially
unchanged at 44% (from 43% in 1999). Traditional indemnity plan
enrollment fell from 11% to 8%.
The smallest employers (10-49 employees) were the most likely to
switch to HMOs in 2000, perhaps spurred by a total health benefit
cost increase of 14% in 1999. In 2000, 38% of these employers
offered an HMO, up from just 30% in 1999.
Despite rising costs, plan sponsors aren't ready to throw in the towel
The Mercer survey asked employers for their perspective on the
much-discussed "defined contribution" (DC) approach to providing
health coverage, under which employers would no longer directly
sponsor current health plans. Instead, they would contribute a
pre-determined dollar amount toward coverage that employees
would buy on the open market. (Tax laws currently do not favor this
approach; the survey asked employers to assume the tax laws were
changed.)
One proposed DC arrangement, which would retain relatively high
employer involvement, calls for the employer (or a vendor they
select) to arrange for employees to have a choice of 10 or so plans.
Employees would receive vouchers to put toward the cost of these
individual policies. While the surveyed employers favor this type of
DC arrangement by a slim margin over the other three described,
only 5% are very receptive to such an approach, while 24% are
somewhat receptive, 22% are not at all receptive, and 49% could
not say.
At the other end of the spectrum, an employer would simply increase
pay and leave employees to find individual policies on their own.
Again, 5% employers said they would be very receptive to this
approach, but only 18% are even somewhat receptive and 53% are
not at all receptive (24% couldn't say).
What are employers' reservations about an approach that would let
them "get out of the health care business" and give them control over
their health benefit spending? Most (84%) believe that some of their
employees would not get coverage under such a system, either due to
chronic illness or because they felt they couldn't afford or didn't need
the coverage. And, while the majority (55%) said it was impossible
to predict the impact that a general move to a DC approach would
have on the cost of health coverage, 28% believe it would raise
health insurance cost overall, while only 8% believe it would lower
cost.
Other findings
Technology makes gains. The use of Internet/intranet technologies in
employee benefit administration is starting to take hold, led by large
employers. Over one-third (35%) of employers with 500 or more
employees, and two-thirds of those with 20,000 or more employees,
currently use Internet/intranet applications in providing benefits. The
most common uses are to provide forms and access health and
welfare benefit information. A fifth of all large employers are
conducting open enrollment for 2001 via Internet/intranet, although
most of them will also give employees the option of paper or
telephone enrollment as well.
Litigation concerns mount.
The percentage of large employers who
say they are concerned about litigation by health plan participants
rose from 68% in 1999 to 79% in 2000. Virtually all of the largest
employers (97% of those with 20,000 or more employees) say they
are concerned - and with good reason. During the past two years,
8% of these very large employers have been named in a legal action
related to medical care provided through one of the health plans with
which they contract. While household-name employers are the most
likely targets of lawsuit, a handful of mid-sized employers (2% of
those with 1,000 - 4,999 employees) have been named legal actions
since 1999.
Alternative medicine coverage spreading.
Coverage of chiropractic
care has become the rule rather than the exception. It is covered in
70% of employers' largest medical plans, up from 62% last year.
Acupressure/acupuncture is covered in 17% of plans, up from 12%,
and massage therapy is covered in 12%, up from 7%.
Domestic partner coverage.
The percentage of large employers (500
or more employees) who consider same-sex domestic partners as
eligible for dependent coverage was essentially unchanged in 2000,
at 12% (in 1999, it was 11%).
Dental benefits.
Comprehensive dental benefits are offered by 51%
of all employers. Among these employers, the use of dental care
PPOs rose sharply for a second year in a row, from 32% to 42%.
The cost of dental coverage averaged $470 per employee, an
increase of only about 1%. There was no change in either the median
deductible ($50) or the maximum annual benefit ($1,000).
Health benefit cost varies widely by region. Comparing the four
census regions, the overall average cost per active employee
reached $4,959 in the Northeast, $4,474 in the Midwest, $4,287 in
the West, and $4,129 in the South.
About the survey
The Mercer/Foster Higgins National Survey of Employer-sponsored
Health Plans is the largest and most comprehensive annual survey of
its kind, with over 3,300 respondents in 2000. The survey is
conducted in accordance with rigorous statistical standards. Mercer
used a national probability sample of public and private employers
and weighted the results to reflect the demographics of all employers
in the US with 10 or more employees that offer health coverage.
Therefore, the survey results represent about 600,000 employers and
over 90 million full- and part-time employees.
Copies of the National Survey of Employer-sponsored Health Plans
2000 will be available in mid-February for $500 each. To order,
contact Tara Lewis at William M. Mercer, Incorporated, 1166
Avenue of the Americas, 28th Floor, New York, NY 10036, or
tara.lewis@us.wmmercer.com.
William M. Mercer, Incorporated, one of the nation's leading
consulting organizations, assists employers in the areas of human
resource strategy and implementation. Headquartered in New York
and with offices in more than 40 US cities, the firm is the US
operating company of William M. Mercer Companies LLC, a
worldwide consulting organization with 13,000 employees serving
clients in 127 cities in 37 countries and territories. |
