A Dip in Healthcare Cost Increases?

Next year’s cost increase, at an average of $582 per employee, would have been close to $700 but for employer efforts to improve efficiency through vendor management and care management initiatives, according to Towers Perrin.

However, “Don’t be fooled into thinking that total costs will be significantly lower this year than in years past,” cautioned Jim Foreman, Managing Director of Global Health and Welfare for Towers Perrin. “The cumulative effect of soaring costs year over year has created a bigger cost base, which means that, while this year’s percentage increase creates an appearance of lower costs, the increase in the actual dollar amount is similar to year’s past.”

According to the survey, employees will contribute 16% of the premium cost for employee-only coverage and 25% for dependent coverage (21% overall). In dollar terms, employees will contribute an average of $57 a month ($680 annually) for employee-only coverage and $208 a month ($2,503 annually) for family coverage in 2005.

Cost Shifts

Employees are paying 56% more in health care costs today than they spent four years ago, and 71% more than they spent eight years ago. At the same time, employers are paying 63% more in health care costs today than they spent four years ago, and 87% more than they spent eight years ago, according to Towers. Still, this year’s survey shows that the average employee share of premium costs will increase 14% in 2005, while the employer share will increase by 7% in 2005. In addition, this year’s survey respondents reported an average reduction in benefit levels of 2%, increasing employees’ expenses at point of care through higher co-pays and deductibles (which are in addition to employees’ premium contributions).

The survey found that the average reported 2005 cost of medical coverage for all types of health plans combined is:

• $328 per month ($3,936 annually) for employee-only coverage;
• $668 per month ($8,016 annually) for employee-plus-one-dependent coverage and
• $945 per month ($11,340 annually) for family coverage

Towers noted that the 11% increase over 2004 is higher for retirees under age 65 than the 8% average for active employees, a trend that has persisted in employer-sponsored plans since 1999.

Retiree Impacts

Retirees, meanwhile, will contribute over 40% of the total cost of their coverage. Retirees under 65 will pay an average of $180 a month ($2,166 annually) for retiree-only coverage, while retirees age 65 and older will pay an average of $104 a month ($1,248 annually) for retiree-only coverage

As for Medicare-eligible retirees, the impact of the Medicare Modernization Act (MMA) is already being felt as Medicare Advantage plans begin to lower premiums in response to renewed government support. Towers said that premium reductions are especially significant in certain states such as , which will see a reduction in Medicare Advantage premiums of about 10%. A quarter of the Towers Perrin survey respondents say they will encourage enrollment in Medicare Advantage plans and, in response to the new Medicare subsidy for employer-provided drug benefits, over half (60%) say they will provide 2005 prescription drug coverage for retirees that is at least as rich as the standard Part D benefit. As many as 5% of the large employer plan respondents say they plan to introduce tax-favored health savings accounts (HSAs) in 2005, even though the government has only just recently provided guidance on how these accounts will work (see Treasury Department Out with HSA Technical Guidance ).

The Towers Perrin results suggest there is a dramatic difference in cost increases between HMOs (10%) and self-funded PPOs (7%). This may be due in part to two factors, according to the survey’s authors: Either there continues to be underwriting conservatism on the part of the HMOs that is not in line with current trend forecasts, or HMOs set their 2005 cost increases earlier in the year, when it was more difficult to project costs into 2005.

This year’s survey includes data on the health benefit programs provided by 200 of the nation’s largest employers, covering over 4.5 millionemployees, retirees and dependents.