Human Capital & Careers

Health-Care Costs Rose 7.5 Percent

Smaller companies benefited more than larger businesses from increased price competition among insurers, a survey found; they were also more aggres...
Stephen TaubApril 19, 2005

Average per-employee health-care costs rose just 7.5 percent in 2004, according to an annual survey by Mercer Human Resource Consulting. That increase, the lowest in five years, is much lower than the 10.1 percent jump in 2003.

According to the survey of 3,020 employers, the average total cost of health benefits for their active employees, for all medical and dental plans, rose from $6,215 in 2003 to $6,679 in 2004. Those amounts include employer and employee premiums but not employee out-of-pocket expenses.

What accounts for this slowdown in heath-benefit costs?

Mercer pointed out that cost-shifting was somewhat more restrained in 2004 than in 2003, when employers sharply raised deductibles and co-payments. According to the consultancy, longer-term cost-management strategies gained traction among large employers; employees are decreased their use of health-care services; and insurers are priced their offerings more competitively.

Perhaps the biggest reason for the slow climb in costs, however, is that smaller companies did an especially good job at keeping a lid on expenses. According to the survey, organizations with between 10 and 499 employees said their costs rose just 5.5 percent, to $6,359. Companies with 500 or more employees, however, saw their costs rise 9 percent, to $6,918.

Smaller employers were helped by increased price competition in 2004, as not-for-profit insurers lowered premiums to reduce surpluses and for-profit insurers were forced to follow suit, Mercer pointed out. Smaller employers, which tend to be fully insured, benefited more than large employers, which tend to self-fund their plans.

Another reason costs rose more slowly among smaller employers was their aggressive cost-shifting, Mercer found. “When you start the year with a $1,000 deductible and don’t see any major expenses ahead, you think twice about going to the doctor if you have a cold,” observed Blaine Bos, a Mercer consultant and one of the study’s authors. Fully 31 percent of small-employer PPO plans have an in-network deductible of $1,000 or more, but just 6 percent of large-employer plans have deductibles that high. “For the employers hit hardest by rising costs, cutting way back may have been the only way to stay in the game,” said Bos.

Looking ahead, the surveyed employers predicted a 10 percent increase in costs this year for their current medical plan with their current vendor. However, they said they expect to spend only 6.6 percent more because they intend to make design changes, drop their plan, or negotiate with or change plan vendors.

Indeed, 21 percent of surveyed employers said they would increase employee cost-sharing through deductibles, co-payments, and out-of-pocket maximums in 2005. The same number said they will increase the percentage of premiums paid by employees.