The 2020 Mid-Year Economic Update_long

Health Cost Hikes to Slow in 2007


Results from three recently released surveys show health benefit costs increases slowed in 2006 and will continue to in 2007. But health benefits continue to outpace wages and inflation. One survey reported that employers reporting lower costs have implemented programs to target high-risk behavior and encourage employees to be smart consumers of health services. Still, many employers are skeptical whether those steps will work.


Premiums for employer-sponsored health coverage rose an average 7.7 percent in 2006, less than the 9.2 percent increase recorded in 2005 and the recent peak of 13.9 percent in 2003, according to the 2006 Employer Health Benefits Survey by the Kaiser Family Foundation and the Health Research and Educational Trust.


This year’s survey recorded the slowest rate of premium growth since 2000, but premiums still increased more than twice as fast as workers’ wages (3.8 percent) and overall inflation (3.5 percent). Premiums have increased 87 percent over the past six years. Another survey reports premiums have increased 60 percent over the past five years.


Family health coverage now costs an average $11,480 annually, with workers paying an average $2,973 toward those premiums, about $1,354 more than in 2000.


Forecast Growth in 2007
Surveys agree that health benefit costs will continue to rise in 2007. According to preliminary survey findings by Mercer Health & Benefits, if employers renewed their current medical plans, with no changes, their average cost increase would be about 9 percent.


About 60 percent of those who had responded to the survey said they are not able or willing to handle an increase of that size and are taking steps to reduce it.


When asked what their actual cost increase would be after changing plans or making plan design changes, employers projected an average increase of 5.6 percent.


In 2007, Mercer reports the gap between cost increases among large and small employers is likely to close. Small employers (10-499 employees) predict their average cost increase (after changes) will accelerate to 5.5 percent while large employers predict their average increase to slow to 5.6 percent. Among employers with 20,000 or more employees, the average cost increase “before changes” is 8 percent. These employers expect a final “after changes” increase of 5.7 percent.


The Towers Perrin 2007 Health Care Cost Survey predicts health care costs will increase by 6 percent. It is unclear whether that increase is based on employers’ planned changes to benefits offered.


According to the Towers Perrin survey, next year’s gross health care expenditure is expected to rise by an average of $518 per employee, to an average total cost of $8,748. Employers are expecting to subsidize 78 percent of next year’s premium costs, while employees will have to cover the remaining 22 percent, plus usage-based co-pays, deductibles and coinsurance.


“While it is good news that 2007 represents the fourth year of declines in the overall rate of increase, it is definitely not a signal that the pressures are abating or that companies can sit back and expect increases to continue their downward trend,” says Ron Fontanetta, a principal in Towers Perrin’s Health and Welfare practice.


“In fact, because most employers can’t pass costs to customers in the form of higher prices, we estimate that, in every year for the past five years, about 1 percent of wage increases have gone to health care costs.”


Cost Containment
Few employers have a lot of confidence in strategies to contain rising health costs, according to Kaiser’s study. Just 17 percent of small employers and 28 percent of large employers say they consider disease management programs “very effective” at controlling health-care costs.


Employers were less likely to rate other strategies as “very effective,” including consumer-directed health plans (16 percent of small and 13 percent of large), higher employee cost-sharing (15 percent of small and 13 percent of large), and tighter managed-care networks (9 percent of small and 4 percent of large).


But while most employers still tend to be skeptical of these strategies, another survey broke companies into “low-cost” and “high-cost” based on how much they are paying for health benefits for their employees.


The Towers Perrin survey found that low-cost companies are not shifting costs to contain costs, but rather have a clear focus and strategic framework for their benefit program, identify problems and opportunities by understanding the current state of their benefit program and the health care system overall, and pursue solutions, including those that address the underlying causes of cost increases.


For example, most low-cost companies (79 percent) “extensively” measure program costs versus less than half (48 percent) of high-cost companies, and are twice as likely to use extensive health-care utilization metrics than their high-cost counterparts. Low-cost companies are also more likely to do some measurement of health status/risks across the population (76 percent versus 47 percent of high-cost).


Low-cost companies provide programs and resources that encourage employees to understand and manage health risks and conditions, Towers Perrin says. Also, low-cost companies educate their employees on how to be a better health care consumer.


Consumer-Driven Health Plans
Kaiser’s survey found only “modest enrollment” in consumer-driven plans, with 2.7 million workers in high-deductible plans with a savings option, including those that qualify for Health Savings Accounts (HSAs). About 4 percent of covered workers are enrolled in such plans, statistically no different from last year.


Relatively few firms that offer other types of health insurance say they are “very likely” to adopt high-deductible plans that qualify for an HSA (4 percent) or that are associated with a Health Reimbursement Arrangement (6 percent) in the next year.


HSAs and HRAs are tax-favored accounts employees can use to pay for medical expenses and often are described as consumer-driven because consumers pay directly for a greater share of their health care and therefore have an incentive to reduce their health-care spending. Among firms with 1,000 or more workers, 12 percent offer an HSA-qualified plan.


Enrollment by plan:



  • Preferred Provider Organization (PPO): 60 percent
  • Health Maintenance Organization (HMO): 20 percent
  • Point-of-Service Plans: 13 percent
  • Conventional Indemnity Plans: 3 percent


Other Findings
Kaiser’s survey found:


About 61 percent of firms offer health benefits to at least some of their workers, statistically unchanged from last year’s rate. Nearly all large businesses offer benefits, but less than half of the smallest firms (three to nine workers) do.


On average, workers are paying $259 more this year than last year toward the cost of family health coverage. Workers at small firms (3-199 employees) on average contribute significantly more to premiums than workers at larger companies. On average, workers are paying about 16 percent of premiums for single coverage and 27 percent for family coverage. That share is unchanged compared to previous years.


In 2006, the average in-network PPO deductible for workers reached $473 for single coverage. Average co-pays for drugs across plan types were $11 for generic drugs, $24 for preferred drugs and $38 for non-preferred.

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