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Health Costs: Sharing the Pain

Companies will require employees to pay more for their health care as costs rise in the near term, says a new study.
Alix Stuart, CFO.com | US
June 16, 2010

Companies are shifting more responsibility for the rising costs of health care to employees, according to a recent study by PricewaterhouseCoopers. More than 40% of the 700 companies surveyed intend to increase employee contributions for health-insurance coverage, while an equivalent number plan to increase medical cost-sharing, including higher deductibles and copayments, at the point of care. Meanwhile, the ranks of those offering health benefits for retirees are shrinking, with a 40% drop among those subsidizing coverage after age 65.

That's a level of cost-sharing that is going to "cause more employees to think about how they use [medical] services," says Michael Thompson, a principal in PwC's human-resource services group.

Average per-patient medical costs are projected to rise 9.5% in 2010 and 9% in 2011, according to separate research from PwC's Health Research Institute. Those estimates are the net results of a variety of significant trends that are pushing costs both up and down. As for health-care reform, the changes that will take place in 2011 will have a minor effect on costs, according to the research (the biggest changes don't start until 2014).

Instead, the main driver of increased costs next year is declining Medicare reimbursements from the government to hospitals, the result of estimated overreimbursements in previous years, says Thompson. Reimbursements are slated to drop by a total of 0.35% next year for this reason and because of a mandate in the Patient Protection and Affordable Care Act to undershoot the inflation rate rather than keep pace with it. That means hospitals will seek to make up the difference from privately funded patients, including those on employer-sponsored insurance plans. "There's always some cost shifting, but this is going to be extraordinary," says Thompson.

Meanwhile, the short-term effects of some generally positive trends are also inflating costs. For one, more physicians and hospitals are consolidating practices. The number of physicians involved in mergers or acquisitions in 2009 was nearly twice that of 2008, according to PwC stats, and is on track to hit a record in 2010. Such consolidations initially give the larger groups more bargaining power with hospitals and insurers, increasing costs, but over time should lead to greater efficiencies and lower costs. PwC also expects hospitals' investment in digitizing medical records to peak in 2011, again adding to short-term costs but likely reducing long-term ones.

As a result, employers are requiring more out-of-pocket cash from employees. One version of that: higher deductibles. In 2011, for the first time, the majority of employees will face a $400 or more deductible. That's up sharply from 2009, when the most common plan had no deductible. For some services, companies are also looking to shift from flat-fee co-pays to percentage-based co-insurance, where the employee shares proportionately in the cost of care (see chart below). Some 53% of employers are using 20% or more co-insurance for most services in their PPO plans now, up from 40% in 2009.

The one bright spot is that some $26 billion worth of prescription drugs, including Lipitor, are going off-patent and will be available in cheaper, generic forms in 2011. The number of people extending coverage through COBRA is also likely to come down in 2011 as fewer layoffs occur, reducing company health-care costs by about half a percentage point on average.

PwC Health Costs Charts


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