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Healthcare Costs Increase -- But at a Declining Rate

Three recent surveys find that employer healthcare costs are moderating, but one worrisome speculation is that the declining costs are due to employees being too strapped for cash to pay for medical care -- as companies continue to shift costs by increasing worker co-pays and deductibles.

Wednesday, October 12, 2011
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Healthcare-coverage costs are higher than both the Consumer Price Index and workers' earnings, but now there is some small light at the end of that tunnel.

Two major HR consulting firms, Mercer and the Segal Co., have just released surveys that predict that the percentage increase is declining and will be lower in 2012 than in recent years.

It's too early to celebrate, but any cost-trend decline is good news for employers, especially after a report last week by the Kaiser Family Foundation that premiums for family coverage went up 9 percent in 2011, compared to 3 percent in 2010.

Mercer, in its annual survey of employer-sponsored health plans, reports that the growth of premium costs will slow to 5.4 percent in 2012, the smallest increase in 15 years. The results come from 1,600 insurers surveyed in September.

The 5.4 percent growth is among companies that anticipate some plan change; for companies that are making no changes, costs are expected to go up 7.1 percent. Last year's projections were 6.4 percent and 9.8 percent, respectively.

Employers are keeping healthcare costs down largely by "shifting to higher deductibles and co-payments. Employees are picking up more," says Beth Umland, Mercer director of health and benefits research in New York.  

The Segal Co. also predicts a decline in the percentage increase of all medical and prescription drug plans in 2012 from 2011 levels, based on its 15th annual survey of health-plan cost trends. The survey was conducted last May and June among some 300 healthcare insurers, including managed-care organizations, pharmacy benefit managers and third-party administrators. The survey looked at employers who have made no changes to their plans that would have affected an increase.

The Segal survey measured gross medical and prescription claims, rather than premiums. The projected increase in managed-care costs ranged from 9.6 percent for HMOs to 10.4 percent for high-deductible health plans, compared to last year's projections of 10.2 percent to 11.7 percent, respectively.

The predicted average growth for all carriers is 10.4 percent, compared to 11.2 percent predicted last year.

In even better news, Segal found that actual-cost trends for 2010 were the lowest in 10 years.

Actual costs usually turn out to be lower than predictions, says Senior Vice President Edward Kaplan in New York. "Unfortunately, it's still a painful projection. Even 10 or 9 percent is above what most employers [can afford]. It's good that it's coming down. It was 12 to 13 percent."

Aon Hewitt, in an analysis released this week, also sees a small decline in the rate of growth in 2012: 7 percent compared to 7.5 percent last year.

But the real news, they say, is that the cost of healthcare for the first time ever has broken $10,000 per employee. The study of more than 350 employers projected 2012 premiums for insured sponsors, and projected claim costs for self-insured sponsors.

"We're finding healthcare costs on an overall basis are going up on a level that is fundamentally unsustainable for American businesses, so [employers] are shifting a higher percentage [of the costs] to employees," says Jim Winkler, large market segment leader of Aon Hewitt's health and benefits practice in Norwalk, Conn.

What's happening?

Healthcare coverage is trending downward for two main reasons: Employers are already spreading the cost to members through high deductibles and co-payments. And consumers are using fewer medical services.

That, in itself, could be either good news or bad. On the positive side, employers may be reaping the benefit of those costly wellness and health-management programs, with reduced illnesses and doctor visits.

On the other hand, in this tight economy, consumers may be postponing doctor visits and procedures, especially if they're paying higher co-pays.

Utilization is "almost flat," says Kaplan. "Many health plans have increased out-of pocket expenses. Members have a lot more financial exposure. That's influencing utilization rates. ... The recession and troubled economy have eaten into disposable income.

"A lot of healthcare is elective," he says. "If it's going to cost $2,000 out of pocket, some people are going to put it off."

The Segal survey suggests additional reasons for the downward trend: More members are using practitioners within the network; and employers are using "value-based" designs to incentivize members, such as lower co-pays for primary physicians versus more expensive specialists.

Interestingly, experts don't see federal healthcare reform -- through the Patient Protection and Affordable Care Act -- heavily influencing coverage costs. The PPACA is not a factor in cost increases in 2012, because most plans are already meeting the law's requirements, Kaplan says.

The biggest impact has been the requirement to insure dependents to the age of 26, which went into effect a year ago. According to Segal, 71 percent of survey participants said the rule would result in an increase of less than 1 percent in 2011.

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Another rule that could hit hard is a requirement that employers offer health coverage to employees working 30 hours or more, which takes effect in 2014.

"PPACA is mostly concerned with increasing coverage. [An employer] would pay more because they are covering more [members]," Umland says.

Employers are still looking for ways to cut their health costs in 2012. 

One-third (33 percent) of Mercer respondents plan to raise deductibles or co-payments in 2012 for employee-only coverage, and 36 percent for dependent coverage. Thirty-nine percent say they will not ask employees to pay a greater share of the cost.

In addition, more employers are offering consumer-directed health plans, which are significantly lower in cost than other health plans for both employers and members, Umland says.

"We're expecting to see a spike in 2012 in both the number of employers offering CDHPs and in the number of employees enrolling in them," says Umland. "These plans are growing steadily. Health reform will cause them to accelerate because they're significantly lower cost."

What's driving the increase in health costs, says Winkler is the increase in the claims costs for chronic conditions, such as diabetes, heart disease and obesity.

"Essentially we're not as healthy as a population as we should be," he says. "What you're seeing, especially in the next two years, is employers are ... requiring more prevention and greater [member] responsibility for their own health," whether through more payments or compliance with health-management programs.

"Some employers are adopting the mind-set that says, 'If you are going to spend a lot of house money, you need to play by house rules,' including completing a health-risk questionnaire, participating in prevention and wellness pans, and better managing chronic conditions," says Winkler.    

"Right now," says Umland, "what seems most cost-effective is health management [and wellness]. It's a win-win.

"We're waiting for the definitive study," she says. "Getting results is hard to measure because you're measuring what didn't happen." 

Kaplan advises employer sponsors to "continue to look for deep discount networks [to] eliminate waste. And [to] continue wellness programs, such as weight loss.

"Basically what we're saying to large employers is, health reform isn't a silver bullet," he says. "You have to come up with ways to limit [spending]."

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