Human Capital & Careers

Health Benefit Costs to Rise Again in ’08

More companies may look for savings by switching to "consumer-driven" plans.
Alan RappeportOctober 2, 2007

Companies continue to spend more on employee health benefits and can expect the rate of increase to rise slightly next year, according to several new studies, but some will try to shift more of the cost burden onto their workers.

Consulting firm Towers Perrin predicts that companies will spend 7 percent more on health care in 2008, reaching an average of $9,312 per employee. A year ago Towers Perrin projected a 6 percent increase in health costs. Companies paid for an average of 78 percent of their employees’ coverage this year, the firm said.

A recent study by the Kaiser Family Foundation found that employer-sponsored health premiums increased by 6.1 percent this year, with workers spending an average of $3,281 from their paychecks for family coverage. Although the increase was less than the 7.7 percent rise reported in 2006, it eclipsed increases in wages and inflation of 3.7 percent and 2.6 percent, respectively. On the other hand, the gap of 2.4 percentage points between the increase in health premiums and wage increases represents an improvement on the 10.9 percentage-point gap recorded four years ago.

“Every year health insurance becomes less affordable for families and businesses,” said Drew Altman, CEO and president of Kaiser.

Next year, however, could be especially costly. Hewitt Associates, a human resources firm, estimates there will be an 8.7 percent increase in health costs for employers in 2008. Hewitt said 2007 brought average cost increases of 8.7 percent for health maintenance organizations (HMOs), 3.9 percent for point-of-service (POS) plans, and 2.4 percent for preferred provider organizations (PPOs).

“We believe the 2007 rates of increase for POS and PPO plans represent somewhat of a market correction from prior-year, conservative pricing assumptions, especially for self-insured plans,” said Bob Tate, chief actuary of Hewitt’s health management consulting business.

Although companies have tried to shift more of the cost of healthcare to employees through “consumer-driven plans,” this still has not really taken off, according to Kaiser, which estimates that in 2007, only 3.8 million workers were enrolled in such plans. That represents just 5 percent of all workers with health benefits, up from 4 percent in 2006.

Such plans, also known as Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs), have tax-savings options but require employees to shoulder more of the cost burden. Employers say these plans, which create incentives for using lower-cost health-care alternatives, are particularly effective in curbing excessive payouts for prescription drugs. According to The Segal Company, a benefits consultancy, companies are spending nearly 9 percent less on prescription drug plans now than in 2003.

“Consumer-driven plans have established a foothold in the employer market, but they haven’t grown as much as one might think,” said Gary Claxton, a vice president of Kaiser and a co-author of its study.

Few companies propose restricting or dropping health coverage, but more say they will change plans to give employees greater incentives to lower their health-care costs. Kaiser finds that 21 percent of firms are “very likely” to raise workers’ premium contributions next year, while 13 percent are very likely to increase office visit cost-sharing. Meanwhile, 12 percent of companies will likely increase deductibles and 11 percent will likely increase office visit cost-sharing.

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