Care Cost for Employers
Will Increase 6.7% in 2006
When annual health benefit cost increases peaked three years ago at
nearly 15%, employers responded with an unprecedented flurry of plan
redesign. Increases have slowed each year since then, with cost rising
just 6.1% in 2005 to an average of US$7,089 per employee, with a similar
increase – 6.7% – predicted for next year.
According to the National Survey of Employer-Sponsored Health Plans
conducted annually by Mercer Health & Benefits LLC, employers
predicted in 2004 that their health benefit cost would rise by an
average of 10% in 2005 if they made no changes. But they expected
to lower that increase to about 7% through a variety of initiatives,
including cost-shifting and changing vendors. Mercer’s 2005
survey, released today, shows they succeeded.
The survey is conducted using a national probability sample and, with
nearly 3,000 employer participants in 2005, is the largest scientific
annual survey on the topic. All employers, public and private, with
at least 10 employees were sampled. The survey was conducted during
the late summer, when most employers have a good fix on their costs
for the current year. Results represent about 600,000 employers and
more than 90 million full-time and part-time employees, and have an
error range of +/-3%.
A key tactic employers used to lower their 2005 cost increase was
again cost-shifting. While the average employee contribution as a
percent of premium was essentially unchanged, employers increased
employee cost-sharing at the point of service. An individual deductible
for in-network care is now required in 80% of PPO plans, up from 73%
last year. Among large employers (500 or more employees) the median
deductible amount rose from US$250 to US$300. The median small-employer
deductible did not change, but the percentage of small employers requiring
a deductible of US$1,000 or more reached 34%, up from 31% in 2004.
Fewer large employers require a deductible of this size (9%), but
their number is growing as well.
The use of coinsurance as a means of sharing the cost of office visits
increased, from 5% to 9% of all PPO sponsors and from 18% to 22% of
all large sponsors. Among jumbo employers (20,000 or more employees),
the use of coinsurance jumped from 26% to 37%. This is a significant
departure from the recent past, in which PPOs moved to copays to compete
more effectively with HMOs for enrollment. Coinsurance reflects the
actual cost of the service provided and thus is seen as a consumerist
strategy. It also tends to shift more cost to employees than copays
Blaine Bos, a consultant with Mercer Health & Benefits and one
of the study’s authors, notes that large employers shifted cost
to employees by raising their out-of-pocket costs for care rather
than by raising their premium contributions. “This signals their
preference for keeping the cost of the plan down for all employees
by shifting cost to those who use it most,” Mr. Bos says.
In HMO plans, the biggest change was an increase in plans requiring
a hospital deductible (from 55% to 64%) and an increase in the average
office visit copayment from US$16 to US$18. Over a fourth of HMO sponsors
(28%) impose a higher copayment for specialist visits, on average
Employers were asked how significant each of six different cost-management
strategies would be to their organizations over the next five years.
“Scaling back benefits or cost-shifting” received the
lowest scores, with just 21% of all employers saying this strategy
would play a significant or very significant role over the next five
years. The two strategies that the most employers say they will focus
on are consumerism, defined as “promoting informed and responsible
spending by employees for health care,” and care management,
a range of programs designed to improve employee health, including
Over a third of all employers (34%) said consumerism will be significant
or very significant to their cost-management efforts over the next
five years, while 32% said care management will be significant or
very significant. Interest in both strategies is higher among large
employers, who gave the highest rating to care management (62%), followed
by consumerism (55%).
“Many employers see these strategies as two sides of the same
coin. Care management programs require the active involvement of employees
in improving their health, while consumerist strategies engage the
employees in managing health care cost,” says Mr. Bos.
Care management programs grew strongly in 2005, lending support to
employers’ assertion that this will be a key strategy for the
next five years. Use of all types of disease management programs grew,
and the percentage of employers offering at least one program jumped
from 32% to 41%. Two-thirds of large employers now offer one or more
disease management programs: 67%, up from 58%.
“As employers are shifting cost to employees who use more health
care, they’re also implementing programs to help them get better
care and learn how to better manage their own health,” says
Health risk assessments, sometimes used to identify employees who
could benefit from a disease management or other care management program,
are offered by 46% of large employers, up from 35%. The use of behavior
modification programs (such as smoking cessation or weight management
programs) rose sharply as well, from 21% to 30% of large employers.
Importantly, employers are beginning to offer incentives to encourage
employees to participate in care management programs, with large employers
taking the lead. In 2005, 17% of large employers that offer health
risk assessments provided an incentive, as did 7% of those offering
one or more disease management programs. These incentives are often
cash, but some employers tie them to the medical plan, offering lower
copayments or premium contributions. Others provide token rewards
or gifts. The value of the incentives offered varies widely, with
about a third of these employers (35%) providing incentives worth
US$25 or less and about a fourth (27%) providing incentives worth
more than US$100.
“While still in a growth mode, care management is now a mature
strategy. Employers are no longer just paying lip service to this
concept,” says Mr. Bos. “Could these programs be one reason
behind the slowing cost increase? You bet.”
For some employers, a deterrent to adding or maintaining care management
programs has been the difficulty of proving their effect on lowering
health benefit cost. Improved health may not result in an immediate
savings but rather curb spending further down the road. As programs
gain longer track records, more employers are attempting to measure
the return on their investment. Over a fifth of all large employers
offering care management programs say they have attempted to measure
ROI (21%, up from 14% in 2004). Among employers with 20,000 or more
employees, this rises to 45%.
Employers implemented a range of consumerist strategies in 2005. Two-fifths
of all employers now provide employees access to a website with information
on provider quality and cost, and 17% provide a tool to help them
select the plan that will best meet their needs based on expected
health care utilization.
Many of the nation’s largest employers took the step of implementing
a consumer-directed health plan (CDHP). Among jumbo employers (20,000
or more employees), CDHP offerings rose sharply, from 12% to 22%.
Otherwise, CDHPs saw only modest growth. Only 2% of all employers
with 10 or more employees offered CDHPs in 2005, and only 5% of large
employers – those with at least 500 employees – offered
Enrollment in CDHPs also remained low. Nationally, just 1% of all
covered employees are enrolled in CDHPs. When a CDHP was offered alongside
other medical plans in 2005, on average 14% of employees chose to
enroll. Among the jumbo employers offering CDHPs, enrollment averaged
Small employers’ lack of interest in CDHPs was a surprise. When
Health Savings Accounts (HSAs) were created by the Medicare Modernization
Act of 2003, proponents said HSAs would expand access to coverage
by providing a less-expensive option for small employers who might
not otherwise offer coverage. This theory hasn’t panned out:
use of CDHPs by this group reached only 2% in 2005, while the percentage
offering any form of health plan dropped from 66% to 63%.
“It seems the cost difference – about 13% lower than the
average cost of HMO coverage, and 18% lower than the average PPO cost
– just wasn’t enough to prevent some small employers from
dropping coverage,” says Mr. Bos. “The more complex plan
design may also be a deterrent given that most small employers don’t
have a robust HR staff.”
He adds that many small employers instead lowered plan cost by raising
deductibles (34% of small PPO sponsors require an individual deductible
of US$1,000 or more). “In 2005, a PPO with a US$1,000-plus deductible
was less costly than the average CDHP,” Mr. Bos says.
Except for the jumbo employers, it’s difficult at this time
to predict what percentage of employers will offer CDHPs in 2006.
Survey respondents complete the survey in the late summer, when many
small employers have not yet finalized plans for the upcoming year.
In 2004, a much higher percentage of small employers said they were
likely to offer a plan in 2005 (12%) than actually did so (2%). So,
while 11% of small employers this year say they are likely to offer
a plan in 2006, this figure should be taken as an expression of interest
rather than a projection. Jumbo employers, who solidify plans earlier
in the year, are better able to provide accurate predictions for the
upcoming year. Among this group, CDHP offerings are likely to rise
to 29% in 2006 and to 31% in 2007.
HMO enrollment drops as employers offer
fewer plan choices
One way for an employer that offers multiple health plans to save
money is to drop one of their more expensive plans. In 2005, 8% of
all large employers, and 31% of those with 20,000 or more employees,
reduced the number of health plans offered. With HMO enrollment falling
from 27% to 25% of all covered employees, it seems likely that the
plans being dropped were HMOs.
Among the jumbo employers, who offer the most plans, the average number
of HMOs offered across all sites fell from 18 to 12 (the median fell
from 8 to 6). Five years ago, these very large employers offered an
average of 34 HMOs.
“HMO plan design, with first-dollar coverage and office visit
copays, insulates employees from the actual cost of care,” says
Mr. Bos. “But with employers focused on making employees into
better health care consumers, they want more cost-sharing –
and more transparent cost-sharing. This disconnect may explain the
slipping HMO enrollment figures.”
Prescription drug benefit cost rising more slowly than underlying
Rx cost trend
One of the forces driving medical plan cost has been sharp prescription
drug benefit cost increases, which peaked in 2000 at 18%. Employers
responded by implementing tiered copayments to encourage greater use
of generic drugs and preferred brand-name drugs – and to increase
the employee share of the cost. In 2005, large employers reported
that the increase in prescription drug spending at their last renewal
was 11.5 %, down from 14.3% in 2004, suggesting that these efforts
have had the desired effect.
According to a Mercer pharmacy benefit specialist, the underlying
drug trend, which is based on the actual cost of pharmaceuticals and
the rate of utilization, is currently averaging around 15%.
In 2005, the use of three-tiered copayments in large employers’
card plans rose from 64% of employers to 68%. Perhaps more significantly,
the use of coinsurance also rose, especially among jumbo employers,
who are more likely to use a specialized pharmacy benefit manager.
Now 14% of all large employers with card plans use coinsurance to
share drug cost with employees, up from 11% last year. Among employers
with 20,000 or more employees, 35% use coinsurance. The use of coinsurance
directly helps to bring down cost trend, because the employee’s
share of the cost goes up with cost inflation, unlike with a fixed
Average copayment amounts were relatively stable for card plans, but
rose sharply in mail-order plans. In large employers’ three-tier
mail-order plans, the generic drug copay rose from an average of US$15
to US$17; the preferred (formulary) brand-name drug copay rose from
US$33 to US$39; and the non-preferred brand-name copay jumped from
US$57 to US$69.
“Steep copays for non-formulary drugs and, to an even greater
extent, coinsurance give employees a strong incentive to think about
which drug they buy for a specific condition,” says Mr. Bos.
© CONTACTO Magazine
Published on November 23, 2005
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