Six Straight Years of Double-Digit Medical Rate Increases Has Had a Significant Impact on Both Employers and Employees

Business Wire, March 3, 2005

PHILADELPHIA -- Hay Group Reviews How Companies Are Turning to Innovative Approaches to Contain Ever-Rising Medical Costs

Company medical insurance premiums for 2005 rose approximately 10%, representing the sixth year of double-digit rate increases. These increases are sharply higher than the US Consumer Price Index that was 3.3% for 2004, and an average annual 2.7% for the last six years.

Stated in terms of payroll, employer costs for health benefits have risen steadily from 7.28% in 2000 to over 9% for 2005, according to the Hay Benefits Report, a cross-industry survey of more than 1000 US companies.

"This is a very difficult time for companies to cope with double-digit medical premium rate increases," said Michael Carter, Vice President in Hay Group's Benefit Practice. "In the current business environment, most companies simply cannot afford to pass these costs along to their customers."

As a result, to maintain current levels of profitability, companies are likely faced with shifting medical costs to employees, exploring new strategies to contain rising medical costs, as well as cutting costs in other areas.

"There is no one 'silver bullet' solution to contain medical costs, so companies must use multiple strategies," says Hay Group's Carter. He adds that "the longer companies wait to address the issue, the more painful it could be for them or their employees."

Traditional Cost Containment Measures Still Used

Companies continue to negotiate with insurers and administrators and bid coverage when necessary to get the best rates. Organizations also continue to consolidate medical plan offerings and funding.

Another traditional strategy is to shift more costs to employees. Many companies pay a fixed percentage of the premium, so when average premiums rise 10%, then employees' costs rise 10%. In addition, companies have been increasing employee deductibles, co-payments, and the limit at which employees' out-of-pocket expenses are capped.

One of the most striking changes in the last three years has been the increase in employee co-payment for doctor visits, with most plans having a co-pay of $15 or more in 2005 versus just under half of the plans in 2002.

Companies Look to Innovative Approaches

"Frustrated with the inability of traditional approaches to sufficiently contain medical increases, companies have turned to innovative approaches," said Carter. These include changes to prescription drug and retiree medical plans as well as introduction of wellness and disease management programs, health savings accounts, and employee consumerism.

--Prescription Drugs

Because prescription drugs have accounted for the largest portion of medical cost increases, employers have been raising plan co-payments, as they have for other medical services. In addition, they have adopted one or more of the following strategies:

--  Increasing the difference between generic, brand, and
            non-formulary co-payments;

        --  Revising from employee dollar co-pays to percentage
            coinsurance (which automatically indexes);

        --  Requiring mandatory generic when available; and/or

        --  Requiring mail order for maintenance drugs.

--Retiree Medical

For companies providing over 65 retiree medical coverage, the new 2006 Medicare prescription drug benefit will offer some relief from the high cash outlay and accounting expense of this coverage. Companies are currently determining whether they can lower their cost more in 2006 and beyond by taking the government's payment for continuing the coverage or by reducing their plan design to supplement the new Medicare prescription drug benefit.

--Wellness and Disease Management

Historically, companies have provided "wellness" programs that include preventive exams, health programs such as smoking cessation, and health club memberships -- all aimed at improving employees' general health. Companies also have offered "case management" programs aimed at controlling costs of major illnesses.

Disease Management focuses on improving the health -- and thus controlling the costs -- of common manageable diseases. These include diabetes, asthma, congestive heart failure, coronary artery disease, and hypertension. These voluntary programs, now in place in most companies, are designed to prevent the state of the disease from advancing, and where possible, to result in improvement.

--New Health Savings Accounts

Health Reimbursement Accounts (HRA) and Health Savings Accounts (HSA) along with "high deductible" plans are also emerging as cost containment strategies. These new types of plans involve a company-funded HRA or employee- or company-funded HSA that employees can use for IRS-approved health expenses -- including some items not typically covered in medical plans. Unused amounts can be carried over to the following year, in theory encouraging employees to become better healthcare consumers. Supplementing the HRA/HSA is a "high-deductible" plan, with typical annual deductibles ranging from $1000 to $3000 per individual.