Health Care Costs Continue Double-Digit Pace, But May Start Moderating in 2004

U.S. health care cost increases continued to escalate at a double-digit pace in 2003, but there are indications that rate hikes may begin moderating as early as next year, according to global HR outsourcing and consulting firm Hewitt Associates (NYSE: HEW). For 2004, Hewitt is projecting a 12.6 percent average increase for employers, which is lower than 2003's 14.7 percent rate.

Large companies are continuing to absorb the majority of next year's increase, but many are also making plan design changes, such as raising copayments and deductibles, and increasing employees' share of health care premiums. According to Hewitt, the average employee contribution for 2004 is projected to be $1,565, representing 22 percent of the overall health care premium, and up from $1,276 in 2003.

"The good news is that we expect health care costs will begin to moderate over the next few years. The bad news is that companies should still expect 9 to 14 percent rate hikes," said Jack Bruner, national health care practice leader, Hewitt Associates. "Clearly, health care cost increases are not going away anytime soon; however, we are seeing some moderation in hospital cost increases and stabilization of prescription drug costs."

2004 Cost Increases by Plan Type

On average, Hewitt forecasts that companies will receive 2004 cost increases of 13.5 percent for health maintenance organizations (HMOs), 12.5 percent for traditional indemnity plans, and 12.0 percent for preferred provider organizations (PPOs) and point-of-service (POS) plans. That means from 2003 to 2004, the average cost of health care for a person working at a major company will increase from $6,018 to $6,831 for HMOs; $6,300 to $7,056 for PPOs; $6,391 to $7,158 for POS plans; and $6,738 to $7,581 for indemnity plans, according to Hewitt's database of more than 2,000 health plans in 139 U.S. markets, including 300 major employers and more than 16 million health plan participants.

"Companies are remaining committed to offering quality health care coverage but cannot afford to absorb the rate of these increases alone, which means consumers will also feel the impact," said Bruner. "Even though the employee portion of health care is on the rise, it's important to point out that organizations are still paying for the vast majority of the overall health care premium."

Cost Increases Across Major Metropolitan Areas

Double-digit rate hikes will affect nearly every major U.S. metropolitan area next year, after most already experienced significant increases in 2003. Hewitt's data reveals that the following cities recorded the highest rate increases in 2003: 19.8 percent in Denver, 19 percent in San Francisco, 17.7 percent in Los Angeles, 16.2 percent in Houston, 15.6 percent in both Chicago and the Tampa Bay area, 14.8 percent in Cincinnati, 14.4 percent in Philadelphia and 14.2 percent in Dallas/Fort Worth.

Employer Reaction to Rate Increases

How are organizations reacting to the rate hikes? In addition to sharing increases with their employees, Hewitt finds that companies are doing the following:

Re-evaluating cost-sharing and contribution strategies. The primary and most effective way companies are managing cost increases is by re-evaluating employee contributions and out-of-pocket costs. Organizations are considering the following tactics: higher payroll contributions, lower subsidies for dependents, and increased office, hospital inpatient and emergency room copayments. Emerging tactics include paying hospitals based on financial efficiency, lifestyle pricing and pay-based contributions.

Changing prescription drug coverage. Prescription drug costs continue to be a major driver behind insurance hikes and employers are actively evaluating new strategies to help contain costs. For next year, companies are implementing higher copayments, coinsurance models, mandated low-cost substitution provisions for certain therapeutic classes and generic incentives.

Contracting with plans that offer specialized or disease management programs. To enhance or maintain the health of their workforce, more employers are contracting with organizations that offer specialized or disease management programs that can help manage employees' chronic health conditions.

Offering new consumer-driven health plans. More employers are evaluating consumer-driven health plans that are designed to provide employees with more choice, flexibility and control in making health care decisions. "We are seeing a lot of employer interest in these types of plans and expect that the number of organizations offering consumer-driven plans as an option to employees in the next few years will significantly increase," said Bruner.

Linking active and retiree health care programs. And, finally, as organizations implement consumer-driven options, some are also offering retiree health care savings accounts in the form of health reimbursement accounts (HRAs). Through increased education around future postretirement health care needs, employees will have more financial incentive to consider the implications of their annual health plan election. "These programs enable employee's to balance their current health care needs with the longer-term need to accumulate savings for retiree health care," added Bruner.