The focus may be on rising energy costs lately, but it’s another sector that promises to be at least as much of a pain in employers’ sides next year: health care. Already weary from stiff health care cost increases over the last few years, employers face another year of double-digit price hikes.

According to a study by management consulting and benefits firm Hewitt Associates, costs will continue to increase at a minimun of 10 percent for preferred provider organizations (PPOs) and point-of-service (POS) plans, 12 percent for traditional indemnity plans, and 13 percent for health maintenance organizations (HMOs).

A similar study, conducted by Milliman & Robertson, an actuarial consulting firm, revealed that the national average for monthly book premium rates is $187.49, up 5 percent. The Mid-Atlantic region, including New York, New Jersey, and Pennsylvania, experienced the greatest increase in premium rate change at 9.5 percent.

Both firms agree that these increases are unlikely to slow any time soon, especially with prescription drug costs continuing to skyrocket. “We may see some stabilization but costs will continue to increase,” warns Ken Sterling, practice leader at Hewitt Associates.

That’s bad news for employers, who thought they had health care inflation licked in the mid-1990s, when increases slowed to a standstill. And, a common tactic of dealing with large rate increases—shifting costs to employees— could prove more difficult than in the past. “We’re in a tight labor market,” says Steven Cigich, health care analyst at Milliman & Robertson. “Employers are in a difficult place and have a lot of challenges to face: such as finding the most value for their benefits and their money.”

Blame It on the Drugs

To be sure, many of the factors that are responsible for soaring health care costs show no signs of abating. Employers can do little about the aging workforce, or the availability of new high-tech treatments that, while promising, can be very expensive. Still, experts place most of the blame for out-of- control health care costs on the steep upsurge in prescription drug costs.

According to Milliman & Robertson’s survey, HMOs reported an increase in prescription drug costs of 27.8% over 1999, rising from an average cost of $19.26 per member per month to $24.61. Although many doctors frequently prescribe generic treatments (often at the request of their patients), prescription drugs remain the biggest challenge to HMO’s attempt to control costs and employers’ attempts to satisfy their employees. “While single service drugs are not prescribed as frequently,” explains Cigich, “costs are considerably higher.”

A big contributor to the high cost of pharmaceuticals is the growing demand for name- brand drugs. Pharmaceutical companies have been given more leeway to pitch drugs directly to consumers, causing them to seek out treatments they might not normally see a physician for. “Direct to Consumer Advertising,” says Cigich, “has people requesting specific prescription drugs from their doctors.” Take Claritin, for example. “Rather than continue with the over-the-counter drugs,” explains Cigich, “patients go to their doctors and demand, ‘Claritin, please!'”

Of course, in many situations only name-brand drugs are available. Drugs like Viox (a treatment for arthritis that just recently came out in early 1999), for example, are patented by the drug manufacturers. Pharmaceutical companies are making decisions on how much society would value these services, and setting the price based on their evaluations.

So, What’s an Employer to Do?

One method employers are exploring, but have failed to embrace en masse, is a disease- management approach. HMOs offer programs that contain basic, low-cost health care to employers to cover most employees, but in addition, they provide custom-designed programs for employees who suffer from various chronic diseases, such as diabetes. As a result, the employer is eliminating unused or unnecessary costs that the company, as well as the majority of the employees, need not pay.

And to address rising prescription drug costs, many employers are carving out prescription benefits and offering them separately. Both Sterling and Cigich agree that if possible, entering into a three-tier system might seem advantageous. There are three types of prescription drugs: generic, formulary, and non- formulary. In a three-tier system, “employees will pay the least for a generic drug, more for a brand-name drug on a formulary list, and the most for a brand-name drug that is not on a formulary list,” says Cigich. This, in a sense, changes the “behavior” of employees when they choose their medications, thus encouraging them to opt for the least expensive, generic drug, if possible.

Increasing co-payments for physician visits, as well as limiting employees to a single network of physicians can also keep costs down. Of course, it also depends on the company’s financial situation, and the benefit it wants to offer.

Internet auctions, though in their infancy, could be another solution to spiraling health care costs. Hewitt unveiled an Internet-based HMO auction program in July that it claims has already saved $3.5 million for participating employers.

Some employers are also setting up what are called medical spending accounts for their employees. Similar to a 401(k), these plans enable employees to take a certain percentage out of their paychecks and place it in an account reserved for medical purposes. However, while this may save the employer money, it could also backfire, because employees may avoid going to the doctor in order to save more money.

Unfortunately, there is no surefire solution to defeating increasing healthcare costs, especially with prescription drugs. Employers need to hang in there but also be aware that they are not stuck to one specific type of coverage. And some experts warn of cutting back on benefits to deal with rising costs. “A happy work force is a productive work force,” says Cigich.