Survey Shows 11 Percent Rise In Employer Health Care Costs

May 7, 2002
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NEW YORK—Employers across the nation have watched their employee-sponsored healthcare benefit cost rise somewhat significantly for the past three years. And over those three years, company executives haven’t made many major changes to their packages in an attempt to retain and attract employees in a highly competitive and tight labor market.

But those days may be over, and sooner than many expected.

Why? Because healthcare costs are expected to jump by 11 percent for most employers in 2001, and by over 20 percent for about 13 percent of the nation’s businesses. So employers will be faced with making changes to what they offer workers, tight labor market or not, and some large, public firms may make ‘draconian’ changes.

“Attraction and retention of employees is still a big issue,” said Blaine Bos, a William M. Mercer healthcare consultant. “But in companies where shareholder demands and the pressure of global competition are driving the bus, controlling runaway expenses takes priority.”

William M. Mercer is one of the world’s leading healthcare consulting firms. Its U.S. division has more than 4,000 employees, 40 offices and 10,000 clients across the country.

The projected healthcare cost increase for employers was one of the findings from its survey of over 3,300 businesses. Another finding was that more employers will raise employee contributions to the healthcare plan, while other firms will raise the plan’s deductibles and co-payments to stabilize company costs.

And both will be done by more companies than in previous years.

Bos reported that 40 percent of employers said they will increase the workers’ share of their contribution this year, while 17 percent said they would charge employees more for out-of-pocket expenses in the company plan. Both percentages are about double of last year’s survey.

In 2000, 21 percent raised the employee contribution to the package, and only 9 percent upped the deductible and co-pay.

Bos said that large companies, those with 500 and more workers, are most likely to make changes. The Mercer survey found that 58 percent of large employers will raise employee contributions and 26 percent will shift costs through other methods.

Those facing retirement are expected to take a hit this year, too, as fewer are likely to be offered some sort of company coverage this year when they leave, than were offered in 2000.

In 2000,  the number of large employers who offered medical coverage for pre-Medicare-eligible retirees fell from 35 to 31 percent, while firms that offered coverage for Medicare-eligible retirees dropped from 28 to 24 percent.

Even though the average cost for covering retirees rose by 10.6 percent over the past two years, Bos suggested that company executives think twice before they stop offering this type of coverage.

“Without a retiree medical plan, employees wait longer to retire – which may delay career advancement for younger employees,” he said. “And those employers trying to attract experienced, mid-career employees may find the lack of retiree coverage hurts them.”

According to the Mercer survey, employee-sponsored health benefit cost rose 8.1 percent in 2000. That means the nationwide average cost per employee went from $4,097 in 1999 to $4,430 last year. Last year’s increase was slightly higher than the 7.3 percent rise in 1999 and the 6.2 percent bump recorded in 1998.

Prescription drug costs fueled last year’s increase – rising by 17.5 percent near year’s end – the largest hike in the last three years. In 1999, drug costs to employer plans jumped 15.2 percent and 11.5 percent in 1998.

Other findings from the Mercer 2000 survey released a few weeks ago show:

  • HMO cost rose more sharply than PPO cost -- 9.6 percent to 7.7 percent – the first time that has happened in seven years.

  • HMO enrollment rose 2 percent last year to 32 percent of all covered employees. PPO enrollment remained stable at 44 percent, while POS plans covered 16 percent.

  • Small employers, with 10 to 49 workers, were more likely to choose HMOs, as 38 percent selected one last year, up by 8 percent from 1999

  • More large companies were concerned about litigation by health plan participants, up from 68 percent in 1999 to 79 percent in 2000.

  • The percentage of large employers who offer same-sex healthcare benefits remained at 12 percent.

  • Health benefit cost was highest in the Northeast at $4,959 per employee. The average cost in the Midwest was $4,287.

Copies of the Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans will be available in mid-February for $500. Contact Tara Lewis for more information at tara.lewis@us.wmmercer.com.

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