Health Insurance Benefit Costs Will Rise 11%

With health insurance premiums expected rise another 11% next year, many employers plan to shift health benefit costs to employees, according to a survey released today by William M. Mercer, Inc. The New York-based benefits consulting firm surveyed over 3,300 companies, 17% of which said they plan to raise employee deductibles and co-payments. The Los Angeles Times reports that employers are passing on the costs to workers as a result of two "convergent" trends -- "a two-year rise in health care costs, combined with [employers'] own reluctance ... to offset the increase by reducing benefits to employees in a tight labor market." Employers were hit last year with an 8.1% increase in employee health insurance rates, and with next year's hike, firms are "willing to risk alienating employees by increasing fees for health care," the Times reports. According to Kirby Bosley, who manages Mercer's health care consulting practice in Los Angeles, the survey found that publicly traded companies that do not compete heavily for labor will be most likely to raise prices, while high tech, entertainment and unionized manufacturing industries would be less likely to pass on health care costs. "In companies where shareholder demands and the pressures of global competition are driving the bus, controlling runaway expenses takes priority," Bosley said (Bernstein, Los Angeles Times, 12/12).

Tracy Cassidy, a senior health care consultant with Mercer, added that "Last year the economy was good, the labor markets tight, and the employers wanted to try to absorb the cost increases because they felt like it was a competitive issue in terms of attracting and retaining employees. But for them to continue to do that year after year becomes problematic" (Brubaker, Washington Post, 12/12). Prescription drug costs were primarily responsible for the rising premiums in 2000, the study found, leaving employers who provide separate benefits for medication with 17% premium hikes last year (Los Angeles Times, 12/12). Thomas Getzen, professor of health management at Temple University, said, "There was a period -- from 1994 through 1999 -- when health insurance premiums were underpriced as insurers tried to attract customers and build market share. Now we are entering a catch-up period, where premiums will increase faster than costs ... as insurers will try to make up some for those lost profits and put some money in the bank" (Goldstein, Philadelphia Inquirer, 12/12).

The survey also revealed that companies will continue to drop health coverage for retirees. In 2000, 31% of firms provided coverage for retirees under 65, down 4% from the previous year, while only 24% offered coverage for those who qualify for Medicare, also down 4% from 1999. The Times notes that the loss to retirees is "significant," as employee benefits help Medicare enrollees pay for services not covered by the federal program, such as prescription drug costs (Los Angeles Times, 12/12). Cassidy said, "The retiree medical costs are significantly outpacing the cost for active employees." She added that more workers are retiring at an earlier age at firms that provide benefits to those who leave before they are eligible for Medicare (Washington Post, 12/12). "This is the year that employers will say, 'Enough,'" Bosley said (Los Angeles Times, 12/12).

According to the Mercer survey, health insurance costs are higher in the South than in the Northeast, the Washington Post reports. Cassidy attributed the differences to a larger number of firms offering lower-cost HMO plans in the Northeast than in the South. For example, in the South, which includes the Washington-Baltimore area, costs for large firms increased by 14.3% in 2000, compared with 3.0% in the Northeast (Washington Post, 12/12). And in Southern California, where managed care participation is high, costs for employers increased only by 7.3%, compared to the national average of 8.1%. However, the cost of basic health insurance, such as HMOs, outpaced the costs of "more liberal" plans, such as PPOs in Southern California (Los Angeles Times, 12/12). Nationwide, HMO costs rose more sharply than PPO costs in 2000 "[f]or the first time in seven years," with increases of 9.6% and 7.7%, respectively (Mercer release, 12/12). The National Survey of Employer-sponsored Health Plans 2000 will be available in Mid-February. Contact Tara Lewis at William M. Mercer at 212-345-2451 to order a copy of the survey.