Surprising Rise in Health Costs

Employers' cost projection, usually on the money, fell far short of actual health-care costs in 2010, Mercer reveals.
David McCannDecember 6, 2010

U.S. companies should hope their collective forecast for health-care costs in 2011 is more accurate than the one they made for this year.

A 6.9% spike in per-employee costs — the biggest since 2004 — caught many by surprise, as the expected increase of less than 6% was left in the dust, according to Mercer’s 2010 survey of 2,836 employer-sponsored health plans, released in late November.

The disparity was notable because, in the 20 years Mercer has been conducting the study, employers have consistently predicted the following year’s costs with great accuracy, says Beth Umland, the firm’s director of health and benefits research.

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Some of the increase was probably the result of workers getting care they put off during the height of the recession, Mercer theorizes. Buttressing that contention, costs shot up 8.5% at large employers (those with more than 500 employees), which are most often self-insured, meaning they pay the cost of claims as incurred. At smaller organizations, which typically offer fully insured plans with fixed premiums, the increase was half as much, at 4.4%.

Another likely factor was the looming specter of health-care reform, Umland suggests. The Patient Protection and Affordable Care Act (PPACA), which will take effect in 2011, limits health providers’ ability to raise costs.

Still, employers are predicting that next year will again bring high increases — and partly because of the PPACA, which requires plans to add coverage for dependents up to age 26 and eliminate lifetime benefit limits. The new law would be responsible for two percentage points of an expected 10% cost hit if employers made no changes to their plans. However, they believe that through such steps as raising deductibles, adding low-cost consumer-directed health plans (CDHPs), and providing workers with financial incentives to take better care of themselves, they can keep actual cost growth to 6.4%.

Yet just a year ago, growth in health-plan costs had slowed to 5.5%, the lowest figure since 1997. Now, in light of 2010’s unexpected surge, confidence in the forecast for next year might be shaky. “Employers were actually feeling good about holding costs to an average 6% increase for the past five years. At least there was stability,” says Umland. “But what happened in 2010 is setting off all kinds of warning bells.”

In other survey results, for the first time the per-employee cost was higher for HMOs than PPOs, by about $100. HMO enrollment, which peaked at 33% of covered employees in 2001, sunk two more percentage points in 2010, to 19%. Employers prefer PPOs because they provide far more flexibility to share costs with employees.

Enrollment in CDHPs rose about two percentage points for the fifth consecutive year, reaching 11% of covered employees. In fact, 8% of employers with fewer than 500 employees, and 2% of larger companies, offered only a CDHP; until this year, that was very rare, says Umland. The appeal is clear: the average cost per employee under such a plan, $6,759, was about 25% lower than the cost of PPO coverage.

Mercer CDHP chart