Scrutinizing Healthcare Cost Trends
The news about U.S. health benefit costs has improved in recent years. A national survey from Towers Perrin shows that premium increases among Fortune 500 companies are expected to be around 7% in 2006, down from 8% in 2005, 12% in 2004 and 15% in 2003. But, while the trend line is going in the right direction according to that particular survey, health benefit costs are still rising at twice the inflation rate (Biddle, 2006), and this has a number of crucial implications for businesses.
First, controlling health costs has to remain a top priority. In fact, it was the number one management concern of U.S. executives in 2005, according to a poll conducted by the Society for Human Resource Management (“Health Care,” 2005). Likewise, a poll of benefit specialists showed health care to be their main concern in 2005 (“Health Costs,” 2005).
Second, companies must keep a close eye on cutting-edge cost-control approaches. A survey conducted by Watson Wyatt Worldwide and the National Business Group on Health found that the companies that are best at controlling medical plan costs are more likely to focus on factors such as quality, evidence and the appropriate use of healthcare services.
The companies that do best in terms of controlling costs, reports the consulting firm Watson Wyatt (2006), “are 32% more likely to focus on quality of care (e.g., paying a differential to higher-quality providers) and 24% more likely to have programs that assist employees in managing their own health than their poor-performing counterparts.” These organizations are also more likely to use hard evidence and data in the management of their programs and to provide incentives and information on how to use medical services wisely.
Another implication of rising costs is that the current tide of cost shifting is unlikely to recede. The Watson Wyatt survey found that “merely increasing employee accountability or sharing costs with employees does not reduce overall cost increases,” but it’s clear that more companies are shifting costs as they try to hold down benefit expenditures. A survey conducted by Mercer Human Resource Consulting showed, for example, that 80% of PPO plans required an individual deduction for in-network care in 2005, up from 73% just a year earlier. Mercer consultant Blaine Bos noted, “Employers kept the cost of the plan down for all employees by shifting costs to those who use it most” (“Cost,” 2006).
A fourth implication of rising costs is that there will be an increase in the number of U.S. residents who don’t have health insurance. A new study in the July issue of The Journal of Labor Economics shows that the rise in health insurance premiums could well boost the number of the uninsured and the unemployed by as many as seven million employees. The authors calculated, according to a press release, that “a 20% increase in health insurance premiums (smaller than the increase seen in many areas in the past three years) would reduce the probability of being employed by 2.4 percentage points – the equivalent of approximately 3.5 million workers.” And it finds that yearly incomes are reduced by $1,700 for workers who have employer-provided coverage (University of Chicago Press, 2006).
Along a similar vein, a recent Robert Wood Johnson Foundation study shows an increase in the percentage of U.S. workers who are eligible for employer-sponsored health insurance plans but who decline the coverage. “With premiums rising each year for companies and their employees, millions of workers are no longer accepting the health insurance offered through their jobs. If trends continue, this could dramatically increase the number of working but uninsured people in this nation,” said Risa Lavizzo-Mourey, CEO of the RWJF (“Number,” 2006).
A fifth implication is that employers should keep a close eye on government reform efforts. As the number of uninsured Americans – currently around 46 million – continues to climb, and as compensation levels are affected, the political pressure to address the problem will only increase. So far, partisan disagreements have helped keep the most far-reaching reform efforts from gaining traction at the federal level, but the recently passed Massachusetts health reform measures demonstrate that bipartisan programs can be forged at the state level. The reforms, which became law in April 2006 and will be implemented in July 2007, require Massachusetts citizens to purchase medical insurance. It combines that individual mandate with Medicaid expansions, insurance subsidies, insurance market reforms, and employer contributions. If it succeeds, Massachusetts will become the first U.S. state to have something approaching a universal health insurance program, covering 90% to 95% of residents.
Under the Massachusetts plan, employers as well as individuals have responsibilities. Businesses with more than 10 workers must either insure their employees or pay an annual fee of $295 per employee per year to help cover the cost of the uninsured in the state. Also, employers of uninsured workers who make heavy use of emergency room care would be obligated to pay somewhere between 10% and 100% of medical bills that are over $50,000 (Rosenfield, 2006). Although they won’t be forced to offer health insurance, employers with 11 or more full-time workers will be obligated to set up cafeteria plans under Section 125 of the Internal Revenue Code in order to allow workers to buy insurance from a state-chartered health insurance market (Serafini, 2006).
If it isn’t ultimately sunk by high costs or a political backlash, the plan could help reduce costs among Massachusetts employers that already provide health insurance. To pay for the uninsured, hospitals tend to shift costs by inflating the medical bills for people who are covered by employer plans. If the number of uninsured is significantly reduced, such employers should benefit, suggests Amy Bergner of Mercer Human Resource Consulting (Geisel, 2006).
It’s still far too early to know whether the Massachusetts plan will become a model for governments at the local, state or even federal level, but it’s clear that businesses should stay abreast of these reform efforts. Ultimately, such efforts could represent the future of U.S. health care – a future in which businesses, government and individual citizens share the responsibility for providing health care in an increasingly integrated system.
For an article on strategies that companies are using to minimize healthcare cost increases, please click here.
For an article on how rising healthcare premiums lead to lower wages, click here.
For an article on Massachusetts’s new law, please click here.
Documents used in the preparation of this TrendWatcher include the following:
Atwater, Andi. “Employers Shift Health Care Costs onto Employees, Survey Finds.” Knight Ridder Tribune Business News. November 22, 2005.
Biddle, Chris. “Employers Scramble to Find Solutions as Employee Health Plan Costs Continue to Rise Faster than Inflation.” New Jersey Business. ProQuest. May 1, 2006.
“Cost Shifting.” The Controller’s Report. ProQuest. February 2006.
Geisel, Jerry. “State Sparks Blaze of Reform.” Business Insurance. ProQuest. May 29, 2006.
“Health Care Costs Rem ain Execs’ No. 1 Concern.” Employee Benefit News, February 2005, p. 15.
“Health Costs, Talent Rewards Top Priorities for Employers in 2005, Benefits Survey Says.” Human Resources Report, January 17, 2005, p. 54.
“Number of Workers Enrolled in Employer-Sponsored Health Coverage Drops; Employees Decline Coverage Because of Cost, Study Says.” Medical News Today [Reuters – Los Angeles Times]. May 9, 2006.
Rosenfield, Carl. “United States: Massachusetts Health Care Reform.” Mondaq Business Briefing. ProQuest. June 6, 2006.
Serafini, Marilyn Werber. “The Mass.-ster Plan.” National Journal, June 10, 2006.
University of Chicago Press. “Rising Health Care Premiums Lead to Lower Wages and More Part-Time Employment.” Press release. June 5, 2006.
Watson Wyatt Worldwide. “Employer Interest in Consumer-Directed Health Plans Growing, Watson Wyatt/National Business Group on Health Survey Finds.” Press release. March 16, 2006.
Below are other recommended articles on the Massachusetts reform plan:
Altman, Stuart and Michael Doonan. “Can Massachusetts Lead the Way in Health Care Reform?” The New England Journal of Medicine, May 18, 2006, pp. 2093-2095.
Hechinger, John and David Armstrong. “Massachusetts Seeks to Mandate Health Coverage.” Wall Street Journal Online, April 5, 2006.
Heil, Emily. “Something for Dingell and Kennedy...and Tomas and Enzi.” National Journal. ProQuest. June 10, 2006.
Steinbook, Robert. “Health Care Reform in Massachusetts – A Work in Progress.” The New England Journal of Medicine, May 18, 2006, pp. 2095-2098.
First, controlling health costs has to remain a top priority. In fact, it was the number one management concern of U.S. executives in 2005, according to a poll conducted by the Society for Human Resource Management (“Health Care,” 2005). Likewise, a poll of benefit specialists showed health care to be their main concern in 2005 (“Health Costs,” 2005).
Second, companies must keep a close eye on cutting-edge cost-control approaches. A survey conducted by Watson Wyatt Worldwide and the National Business Group on Health found that the companies that are best at controlling medical plan costs are more likely to focus on factors such as quality, evidence and the appropriate use of healthcare services.
The companies that do best in terms of controlling costs, reports the consulting firm Watson Wyatt (2006), “are 32% more likely to focus on quality of care (e.g., paying a differential to higher-quality providers) and 24% more likely to have programs that assist employees in managing their own health than their poor-performing counterparts.” These organizations are also more likely to use hard evidence and data in the management of their programs and to provide incentives and information on how to use medical services wisely.
Another implication of rising costs is that the current tide of cost shifting is unlikely to recede. The Watson Wyatt survey found that “merely increasing employee accountability or sharing costs with employees does not reduce overall cost increases,” but it’s clear that more companies are shifting costs as they try to hold down benefit expenditures. A survey conducted by Mercer Human Resource Consulting showed, for example, that 80% of PPO plans required an individual deduction for in-network care in 2005, up from 73% just a year earlier. Mercer consultant Blaine Bos noted, “Employers kept the cost of the plan down for all employees by shifting costs to those who use it most” (“Cost,” 2006).
A fourth implication of rising costs is that there will be an increase in the number of U.S. residents who don’t have health insurance. A new study in the July issue of The Journal of Labor Economics shows that the rise in health insurance premiums could well boost the number of the uninsured and the unemployed by as many as seven million employees. The authors calculated, according to a press release, that “a 20% increase in health insurance premiums (smaller than the increase seen in many areas in the past three years) would reduce the probability of being employed by 2.4 percentage points – the equivalent of approximately 3.5 million workers.” And it finds that yearly incomes are reduced by $1,700 for workers who have employer-provided coverage (University of Chicago Press, 2006).
Along a similar vein, a recent Robert Wood Johnson Foundation study shows an increase in the percentage of U.S. workers who are eligible for employer-sponsored health insurance plans but who decline the coverage. “With premiums rising each year for companies and their employees, millions of workers are no longer accepting the health insurance offered through their jobs. If trends continue, this could dramatically increase the number of working but uninsured people in this nation,” said Risa Lavizzo-Mourey, CEO of the RWJF (“Number,” 2006).
A fifth implication is that employers should keep a close eye on government reform efforts. As the number of uninsured Americans – currently around 46 million – continues to climb, and as compensation levels are affected, the political pressure to address the problem will only increase. So far, partisan disagreements have helped keep the most far-reaching reform efforts from gaining traction at the federal level, but the recently passed Massachusetts health reform measures demonstrate that bipartisan programs can be forged at the state level. The reforms, which became law in April 2006 and will be implemented in July 2007, require Massachusetts citizens to purchase medical insurance. It combines that individual mandate with Medicaid expansions, insurance subsidies, insurance market reforms, and employer contributions. If it succeeds, Massachusetts will become the first U.S. state to have something approaching a universal health insurance program, covering 90% to 95% of residents.
Under the Massachusetts plan, employers as well as individuals have responsibilities. Businesses with more than 10 workers must either insure their employees or pay an annual fee of $295 per employee per year to help cover the cost of the uninsured in the state. Also, employers of uninsured workers who make heavy use of emergency room care would be obligated to pay somewhere between 10% and 100% of medical bills that are over $50,000 (Rosenfield, 2006). Although they won’t be forced to offer health insurance, employers with 11 or more full-time workers will be obligated to set up cafeteria plans under Section 125 of the Internal Revenue Code in order to allow workers to buy insurance from a state-chartered health insurance market (Serafini, 2006).
If it isn’t ultimately sunk by high costs or a political backlash, the plan could help reduce costs among Massachusetts employers that already provide health insurance. To pay for the uninsured, hospitals tend to shift costs by inflating the medical bills for people who are covered by employer plans. If the number of uninsured is significantly reduced, such employers should benefit, suggests Amy Bergner of Mercer Human Resource Consulting (Geisel, 2006).
It’s still far too early to know whether the Massachusetts plan will become a model for governments at the local, state or even federal level, but it’s clear that businesses should stay abreast of these reform efforts. Ultimately, such efforts could represent the future of U.S. health care – a future in which businesses, government and individual citizens share the responsibility for providing health care in an increasingly integrated system.
For an article on strategies that companies are using to minimize healthcare cost increases, please click here.
For an article on how rising healthcare premiums lead to lower wages, click here.
For an article on Massachusetts’s new law, please click here.
Documents used in the preparation of this TrendWatcher include the following:
Atwater, Andi. “Employers Shift Health Care Costs onto Employees, Survey Finds.” Knight Ridder Tribune Business News. November 22, 2005.
Biddle, Chris. “Employers Scramble to Find Solutions as Employee Health Plan Costs Continue to Rise Faster than Inflation.” New Jersey Business. ProQuest. May 1, 2006.
“Cost Shifting.” The Controller’s Report. ProQuest. February 2006.
Geisel, Jerry. “State Sparks Blaze of Reform.” Business Insurance. ProQuest. May 29, 2006.
“Health Care Costs Rem ain Execs’ No. 1 Concern.” Employee Benefit News, February 2005, p. 15.
“Health Costs, Talent Rewards Top Priorities for Employers in 2005, Benefits Survey Says.” Human Resources Report, January 17, 2005, p. 54.
“Number of Workers Enrolled in Employer-Sponsored Health Coverage Drops; Employees Decline Coverage Because of Cost, Study Says.” Medical News Today [Reuters – Los Angeles Times]. May 9, 2006.
Rosenfield, Carl. “United States: Massachusetts Health Care Reform.” Mondaq Business Briefing. ProQuest. June 6, 2006.
Serafini, Marilyn Werber. “The Mass.-ster Plan.” National Journal, June 10, 2006.
University of Chicago Press. “Rising Health Care Premiums Lead to Lower Wages and More Part-Time Employment.” Press release. June 5, 2006.
Watson Wyatt Worldwide. “Employer Interest in Consumer-Directed Health Plans Growing, Watson Wyatt/National Business Group on Health Survey Finds.” Press release. March 16, 2006.
Below are other recommended articles on the Massachusetts reform plan:
Altman, Stuart and Michael Doonan. “Can Massachusetts Lead the Way in Health Care Reform?” The New England Journal of Medicine, May 18, 2006, pp. 2093-2095.
Hechinger, John and David Armstrong. “Massachusetts Seeks to Mandate Health Coverage.” Wall Street Journal Online, April 5, 2006.
Heil, Emily. “Something for Dingell and Kennedy...and Tomas and Enzi.” National Journal. ProQuest. June 10, 2006.
Steinbook, Robert. “Health Care Reform in Massachusetts – A Work in Progress.” The New England Journal of Medicine, May 18, 2006, pp. 2095-2098.