Human Capital & Careers

Health Plan Costs Out of Control?

Despite the expected jump in the cost of health plans, one forecast says increases will be less than the spikes of the past few years.
Helen ShawAugust 31, 2006

The cost of health insurance plans is on the rise again, but the price increases for 2007 are forecast to be less than those of the last few years.

According to a survey by benefits consultancy Segal Company, medical and prescription drug plan costs are expected to increase between 11 percent and 12 percent. The jump is more than double the increase in the consumer price index and the increase in real average weekly earnings; both stood at 4.1 percent as of July 2006. The price increases apply to preferred provider organizations (PPOs) and health maintenance organizations (HMOs).

Costs for managed dental networks are projected to remain the same as this year, while dental fee-for-service costs are expected to rise by 7.5 percent in 2007. The cost of vision plans are forecasted to rise by 5 percent, the lowest increase of all health plans.

Since 2003, however, projected costs of health plans have declined. But, that is small consolation for plan providers when the price surges outpace wage and inflation growth. “These are still alarming increases,” notes Sean Brandle, vice president at Segal Company.

The decline in projected price increases is due to a combination of the prominence of generic drugs and efforts by companies and pharmacy benefit managers to control costs, said Brandle. For example, quantity control programs limit the amount of a drug that patients can receive within one month to prevent people from stockpiling drugs, a practice that escalates prices, he noted.

Yet, there are differences in costs between regions, indicating that companies might have room to negotiate discounts in their local markets, counsels Segal. For instance, compared to national plans, cost increases for plans by managed care organizations and third party administrators are two percentage points lower in the Midwest and one percentage point lower in the East. Cost increases for plan providers in the West are comparable with national plans.

Price inflation for supplies and service constitute the largest part of expected price increases for PPOs and HMOs. For prescription drug plans, inflation of brand drug prices, which is expected to be 7.6 percent in 2007, continues to be the most significant factor of price increases. Additionally, expensive biotech drugs that treat serious diseases such as cancer and severe arthritis are driving the increase in prescription drugs, said Brandle.

One possible silver lining is that projected health plan costs have been higher than actual costs in the past, according to the Segal data, which compared the rates to assess the accuracy of the forecasts. Between 2003 and 2005, the actual price increases of medical and prescription drug plans were about 5 percentage points less than forecast.

While the forecasted price growth is significant, companies that sponsor health care plans can take steps to maintain costs. Companies can examine information on how the money is being spent and devise ways to implement changes. “Then you can consider different plan designs and vendors to control costs,” said Brandle. Some companies take steps to help both employees and the company by offering a lower drug co-payment for a blood pressure drug to encourage employees to continue their treatment, for instance.

Overall, the surge in prices—which is less than the 20 percent increases of previous years—almost seems palatable, remarks Brandle. “Plan sponsors should continue to look at the data and analyze it because it will tell them where to focus their efforts and where they can get the most benefit for their dollars,” he said.