Human Capital & Careers

Early Line: 2008 HMO Prices to Rise 14 Percent

Companies will continue to shift costs to employees—some may self-insure.
Stephen TaubJuly 5, 2007

Containing corporate health-care cost may prove challenging over the next year. According to a preliminary report from Hewitt Associates, health maintenance organization (HMO) premium rates are poised to increase by 14.1 percent in 2008—the highest rate increase in four years.

The forecast is based on rates submitted before plan changes, negotiations and terminations. Last year, early data predictions projected an 11.7 percent increase for 2007. That rise eventually dropped to a final average HMO rate increase of 8.2 percent after changes were factored into the calculation. In 2006 and 2005 Hewitt predicted rate increases of 12.4 percent and 13.7 percent respectively.

The report is based on data reported by Hewitt Health Resource, a Website that captures HMO rate information for nearly 160 large companies representing more than 1 million employees and annual premiums of nearly $3 billion.

“While the majority of HMOs are proposing initial rate increases that are consistent with those provided in previous years, a few carriers have proposed significantly higher rate increases for 2008, which seems to be the primary reason for the spike in this year’s overall rate increase across plans,” said Jeff Smith, a senior consultant and co-leader of Hewitt’s HMO rate analysis project. “We expect that average rates will decrease once negotiations are complete; however, they may continue to be in the double digits.”

As has been the case for a few years, employers are considering a number of strategies to help mitigate the impact of high HMO premium increases on their health-care budgets this year. For example, companies plan to continue shifting costs to employees. In some cases, they have separated out co-pays between primary care providers and specialists—typically the co-pay for a specialist is $15 to $20 higher to discourage inappropriate use of the experts.

In addition, an increasing number of companies expect to further eliminate local HMO offerings and consolidate those plan participants under a self-insured arrangement. In a self-insurance plan, companies assume the full financial risk for medical claim costs, paying a health plan an administrative fee for services such as claims processing and provider network management. “Self-insurance reduces employer administrative costs and allows companies to pay claims based on their own experience rather than health plan book-of-business experience and trend rates,” Hewitt notes in its report.

In addition, employers will continue to negotiate aggressively with their health plans in an effort to reduce initial premium increases. However, Hewitt concedes this is becoming an increasingly difficult strategy for mitigating costs.

HMO costs will vary depending on region. For instance, two regions—the Southeast and Midwest—figure to experience significantly higher-than-average rate hikes next year. Hewitt’s preliminary analysis forecasts an 18.2 percent increase for the Southeast in 2008 compared with 11 percent at this time last year. An 18.4 percent hike is projected for the Midwest, compared with 11.5 percent last year.

In 2007, just the West experienced higher-than-average rate hikes, reported Hewitt, which noted a 10 percent increase for that region. Workers fared best in the Southwest in 2007, where rates rose 6.1 percent, after plan changes, negotiations and terminations.

“We always expect to see variances in rate increases across regions, due to differences in demographics, provider costs, and common plan designs and coverage, as well as rates for health plans that target these areas,” said Maureen Fay, senior consultant and co-leader of Hewitt’s HMO rate analysis project. “As plans finalize their rates through the summer and fall, we will learn more about the specific cost drivers for these regions.”