Health care costs to increase more than expected

Risk & Insurance, Feb, 2002 by Michael Capozzi

Another year, another double-digit health care cost increase for employers. This bit of information is beginning to become a tired refrain for employers, who have seen the cost of offering health benefits to employees rise dramatically over the last few years.

For 2002, the news is a little bit worse than usual, however, as experts predict increases of 13 percent to 15 percent or more. What's worse, employers were expecting an increase several percentage points lower at budget time, which occurred before the September 11 terrorist attack and before the recession had become full-blown.

"My expectation for 2002 is that most companies have under-budgeted for health care expenses," says Randall Abbott, a senior health care consultant at Watson Wyatt, Washington. "Many CFOs, and in fact many benefit managers, didn't fully understand that benefit plan costs were going up as quickly as they were. Our sense is that many companies budgeted for increases in the 9 percent to 11 percent range," states Abbott.

The events of September 11 will greatly impact health care costs in the form of a strong upswing in behavioral health and employee assistance plan services, as well as a rise in the number of people taking antianxiety and antidepressant prescription medications to deal with the attack's psychological effects, says Abbott. Another reason for the unexpectedly high rise in health care costs is increased administrative expenses caused by layoffs, which force unemployed workers to enroll in COBRA programs. COBRA enrollees typically incur costs at least 50 percent greater than active employees, notes Abbott.

Other reasons for the rise in health care costs include: the rising costs of prescription drugs, escalation in HMO premiums, and increases in fees paid to hospitals and physicians, according to Towers Perrin, New York.

Furthermore, employers expect to face health care cost increases in the 13 percent to 14 percent range over the next five years, according to Hewitt Associates, Lincolnshire, Ill. With this in mind, employers certainly will be looking to reduce costs. There are two ways to do this: shift costs to employees and work to reduce costs overall.

Employee cost-sharing increases will include higher copayments for doctor visits and prescription drug medications, increased use of drug formularies and non-preferred drugs, increased use of coinsurance and yearly deductibles, increased use of employee cost-sharing through payroll deduction, and continued interest in consumer-driven health plans and defined health benefit plans, say the experts.

In addition, employees will also look into ways to reduce overall health care costs. These methods include performing root cause analysis to see what is really driving up costs among their employees; restructuring vendor/HMO offerings to manage those costs more effectively; completely rethinking delivery mechanisms such as aggressive managed care; implementing wellness, disease management and other programs to help employees get healthy and stay healthy in order to help avoid more expensive care, such as specialists and surgeries; using technology to provide information to employees and to support self-service; and educating plan participants in the true cost of care to create more responsible consumers.

The situation, though, is expected to change in the future. "We believe that health care costs will have to level off over the next three to five years. They simply won't be sustainable," Abbott says. "Most companies cannot afford to have their health care costs doubling over the next five to six years." Abbott expects prices to level off over the next few years for several reasons.

"We're in an environment where many of the providers were squeezed in past years because managed care companies were so aggressive in negotiating discounts. As they renegotiate those contracts and get them to a more reasonable level, that will level out," he says. "Prescription drug costs also will level out over the next three to five years."