Human Capital & Careers

Health-care Costs Continue Slowdown

In 2005, costs rose just 6.1 percent, compared with 7.5 percent last year and 10.1 percent in 2003, according to a new survey.
Stephen TaubNovember 28, 2005

For the third consecutive year, the rate of increase in health-care costs has slowed, according to a new survey by Mercer Health & Benefits.

In 2005, costs rose just 6.1 percent, compared with 7.5 percent last year and 10.1 percent in 2003, Mercer reported. This year’s increase was just half the 14.7 percent surge of 2002. The last time health-care costs rose at a 6.1 percent pace was 1998. Mercer forecasts a 6.7 percent increase for 2006.

The average cost per employee this year was $7,089, including the cost of all medical and dental plans for employees and all covered dependents, and including employee premium contributions but not their out-of-pocket costs. This is double what employers shelled out in 1997.

Mercer noted that in its 2004 survey, employers predicted that their costs would rise an average of 10 percent in 2005 if they made no changes. However, they expected to lower that increase to about 7 percent through a number of initiatives, including cost-shifting and changing vendors. Mercer asserts that this year’s survey, which gathered the responses of nearly 3,000 employer participants, shows they succeeded.

According to the survey, the increased employee cost-shifting took place at the point of service. For example, this year 80 percent of preferred-provider organization (PPO) plans require an individual in-network deductible, compared with 73 percent last year.

Among large employers (500 or more employees) the median deductible rose from $250 to $300. Interestingly, the median deductible did not change at small employers; however, 34 percent of these companies now require a deductible of $1,000 or more, up from 31 percent in 2004. In contrast, just 9 percent of large employers require these large deductibles, up from 6 percent.

Coinsurance, another means of sharing the cost of office visits, is now required by 22 percent of large-plan sponsors, up from 18 percent, and by 9 percent of all PPO sponsors, up from 5 percent. What’s more, among employers with 20,000 or more employees, the use of coinsurance surged to 37 percent from 26 percent.

This is a significant departure from the recent past, in which PPOs moved to copays to compete more effectively with HMOs for enrollment, noted Mercer: “Coinsurance…tends to shift more cost to employees than copays.”

As for HMO plans, Mercer points out that the number of companies requiring a hospital deductible jumped to 64 percent from 55 percent, and the average office visit copayment climbed to $18 from $16.

Looking to the future, employers were asked how significant each of six different cost-management strategies would be to their organizations over the next five years. The two strategies with the most positive responses were consumerism, defined as “promoting informed and responsible spending by employees for health care,” and care management, a range of programs designed to improve employee health, including disease management. “Scaling back benefits or cost-shifting” received the lowest score; just 21 percent of all employers responded that this strategy would play a significant or very significant role over the next five years.

The survey also found a slowdown in the increase in prescription-drug benefit costs. After peaking at 18 percent in 2000, the increase fell to 14.3 percent last year and just 11.5 percent this year, large employers reported.

Mercer attributed this improvement to the increase in the use of tiered copayments to encourage greater use of generic drugs and preferred brand-name drugs, and to increase the employee share of the cost. In 2005, the use of three-tiered copayments in large employers’ card plans rose to 68 percent of employers, from 64 percent.

The use of coinsurance also rose, Mercer pointed out, especially among the largest employers, who are more likely to use a specialized pharmacy benefit manager. For example, 14 percent of all large employers with card plans use coinsurance to share drug cost with employees, up from 11 percent last year, but 35 percent of employers with 20,000 or more employees use coinsurance.