Human Capital & Careers

Health-care Forecast: 8 Percent Hike

This would mark the first single-digit bump after four years of increases in the double digits.
Stephen TaubOctober 7, 2004

Finally, there’s some good news on the health-care front. On average, employers need to budget for a cost increase of just 8 percent in 2005, according to a new survey from Towers Perrin.

That would mark the first single-digit bump after four years of increases in the double digits. Employers are paying 63 percent more in health-care costs today than four years ago, and 87 percent more than eight years ago, said Towers Perrin. As for employees, their costs have risen 56 percent in the past four years and 71 percent in the past eight.

But “don’t be fooled into thinking that total costs will be significantly lower this year than in years past,” warned Jim Foreman, managing director of global health and welfare for Towers Perrin, in a statement. “The cumulative effect of soaring costs year over year has created a bigger cost base, which means that, while this year’s percentage increase creates an appearance of lower costs, the increase in the actual dollar amount is similar to years past.”

Factors that continue to drive costs upward, according to Towers Perrin, include higher HMO rates, continued high use of heavily promoted prescription drugs, sharp increases in the price of hospital services, greater demand for more-expensive diagnostic tests such as MRIs, and higher utilization of certain physician specialists.

Foreman did point out that employers who implemented certain care-management and vendor-management initiatives have trimmed approximately two percentage points from the average cost increase. Those initiatives are expected to limit next year’s increase to $582 per employee; that figure would be closer to $700, maintained the consultancy, for employers who failed to put these initiatives in place

Towers Perrin also pointed out large variations in cost increases from company to company. The bottom 10 percent of companies reported cost increases greater than 17 percent for 2005; the top 10 percent of companies reported no increase — or in some cases, a decrease — in their costs for next year.

For 2005, the forecast of the average annual cost for all types of health plans is $3,936 for employee-only coverage, $8,016 for employee-plus-one-dependent coverage, and $11,340 for family coverage.

Compared with 2004, the percentage increase is higher for retirees under age 65 than for active employees, continuing a trend since 1999. This is of particular concern for employers who have large postretirement medical obligations, noted Towers Perrin.

The consultancy expects a 7 percent price hike for self-funded PPOs but a 10 percent increase for HMOs. According to Foreman, “As the cost differential continues to widen between HMOs and PPOs, Towers Perrin believes that the trend toward self-insurance as the primary approach among large employers will accelerate.”

Continuing a recent trend, the average employee share of premium costs will increase 14 percent in 2005, while the employer share will increase by 7 percent. Altogether, employees will kick in 16 percent of the premium cost ($680 annually) for employee-only coverage and 25 percent ($2,503 annually) for family coverage. Benefit levels shrank an average of 2 percent through higher co-pays and deductibles.

Retirees, the survey found, will kick in more than 40 percent of the total cost of their coverage. Retirees under 65 will pay an average of $2,166 annually for retiree-only coverage; those 65 and older, an average of $1,248.

Towers Perrin’s 16th annual survey included 200 of the nation’s largest employers covering more than 4.5 million U.S. employees, retirees, and dependents.

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