Health Costs Pounding Employers

January 28, 2003
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GRAND RAPIDS — Recent surveys show no end in sight for escalating health premiums, even as employers adjust their employee health plans to mitigate rising costs.

Health benefit costs rose an average of 10.5 percent for employers in Michigan during 2002 and will rise another 14 percent in 2003, according to Mercer Human Resources Consulting.

Nationally, the average benefit cost shot up by 14.7 percent, from $4,924 to $5,646 annually per employee, Mercer’s annual health cost survey found.

Another survey, from Aon Consulting, anticipated increases between 13.9 percent and 18 percent for this year.

Those types of increases have a growing number of employers passing on higher premiums to employees and altering their health plans by implementing higher co-pay and deductibles, surveys show. The cost shifting toward employees is particularly pronounced in the area of drug prescription benefits.

Employers can “stem the tide” of rising increases by adopting a multi-tiered prescription drug benefit that financially encourages the use of generic medications, said Greg Rhodes of Aon’s Grand Rapids office.

“Increases will continue, that’s a fact, but companies can explore other strategies to help control these rapid cost increases,” Rhodes said.

The health premium increase for medium-sized companies, defined as those with less than 500 employees, was larger than the overall average, according to Mercer. They saw an average increase of 18.1 percent in total employee health costs in 2002.

The Mercer survey found that the largest employers have a “lower threshold of pain” than smaller employers in absorbing rising health costs because medical benefits have a greater effect on the bottom line and they compete on a global basis.

As they prepared for 2003, 25 percent of all employers, and 49 percent of larger employers, said their employees would have to pay a larger share of health costs in 2003.

“Many of the largest employers have crossed that threshold of pain already,” said Blaine Bos, one of the authors of the recent Mercer report. “And we’re starting to see the gloves come off in their cost management efforts.”

The worst pain is felt by small employers who increasingly have to decide whether to even continue employee health benefits. The percentage of firms responding to the Mercer survey with a workforce of 10 to 49 employees that offer employee health benefits fell from 69 percent in 2001 to 62 percent in 2002, according to the firm’s survey.

Employers are pushing insurers and managed-care companies to redesign or develop new health plan products to mitigate rising costs, including HMOs with deductibles, a cost-sharing feature in Michigan that’s now allowed under legislation passed last year.

“You’ll be seeing some creative approaches from HMOs and plan sponsors in the near future, all designed to improve quality and hold the line on costs,” said Ed Murphy, a health care consultant with Mercer’s Detroit office.

Nationally, the 14.7 percent average increase in employer health costs for 2002 is the largest since the 17.1 percent rise in 1991 and came on the heels of a 11.2 percent increase in 2001.

Another avenue employers are taking to mitigate rising costs is switching from HMOs to less costly PPOs, according to Mercer. HMO participation among employers responding to the firm’s survey fell from 33 percent in 2001 to 29 percent in 2002, while PPO enrollment grew from 46 percent to 50 percent.           

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