2009 HMO Cost Hikes Down from 2008

July 15, 2008 (PLANSPONSOR.com) - The good news for employers is that the rate of cost increases for health maintenance organizations (HMOs) is predicted to slow for 2009, but it is still out in front of inflation.

That was the word from Hewitt Associates which gathered HMO rate data from its Hewitt Health Resource site, which features data from 160 large companies with about 1 million participants.

A Hewitt news release said HMO premiums are forecast to rise 11.8% in 2009 compared to an estimated 13.2% in 2008 and 11.7% in 2007. After plan changes, negotiations, and terminations, final average HMO rates in 2008 increased by 9.4%.


“While initial 2009 HMO premium rate increases remain high, we expect to see that employers will once again be able to reduce overall increases – by at least 2% or 3% – through aggressive negotiations, changes in plan offerings and designs, and an increased focus on employee health and productivity,” said Jeff Smith, a senior consultant and co-leader of Hewitt’s HMO rate analysis project, in the announcement. “As the economy continues to weaken, and because salary increases are expected to remain similar to last year, employers are becoming increasingly sensitive to the effect higher health care costs have on employee take-home pay and payroll deductions. As a result, we expect to see more companies move away from traditional employer strategies – such as employee cost-shifting – toward more aggressive and innovative steps that not only help mitigate health care costs, but also keep more money in employees’ pockets.”

Hewitt said its data shows a regional cost difference. While the Southeast region is expected to experience higher-than-average rate increases at 15.4%, the rate has declined from its 2008 level of 18.2%. Meanwhile, the Southwest region will have the lowest premium increase for 2009 at 7.3%, down almost 50% from 13.7% in 2008.

Building on the success of their efforts last year, employers will continue to take aggressive steps in 2009 to mitigate the impact of high HMO premium increases on their health care budgets.

These steps include:

  • An increasing number of companies are aggregating the lives from smaller and/or less efficient HMO plans into a consolidated risk pool with their most efficient health plan administrators. This creates more purchasing power and leverage through the negotiation process and typically results in more realistic assumptions around such factors as overhead and risk margins, while also reducing overall cost by having a smaller number of health plans to manage.
  • In addition, employers are moving away from local and regional fully-insured HMO plan offerings, which have higher administrative costs and are subject to state-mandated benefit requirements that drive up premium costs. Instead, they are consolidating plan participants under self-insured arrangements where they assume the full financial risk for medical claim costs and pay the health plan an administrative fee for services such as claims processing and provider network management.
  • Employer interest in building employee knowledge and ownership for managing their health continues to grow. Most employers believe that keeping employees healthy has a direct impact on controlling health care costs, maintaining high levels of productivity, and mitigating absences.
  • Hewitt's research shows more than 85% of companies invest or plan to invest significant resources in long-term health and productivity initiatives over the next three to five years.
  • As in past years, employers continue to negotiate aggressively with their health plans to reduce initial premium increases, and they are coming to the negotiations table well-informed and ready to articulate their requirements, Hewitt reported.
  • Hewitt research also shows that almost 60% of companies indicated they plan to ask their vendors for quarterly reports on their contribution to their health and productivity strategy within the next five years.

The research indicated that the latest incarnation of employer cost-shifting efforts is to shift a portion of their dependent subsidy dollars to employees (See Paring the Rolls ). This is taking many forms, whether through increased payroll contributions for dependent health care coverage or by applying surcharges to encourage dependent spouses to take coverage under their own employer's plans.

In addition, employers are becoming increasingly interested in conducting dependent audits, to assess and remove plan costs for dependents who don't qualify for coverage based on the employer's eligibility requirements. More than 40% of Hewitt's clients have conducted a dependent audit in the past five years, and another 10% plan to conduct one in 2008.

"On average, covered dependents account for more than half of the cost a company spends on

health care, so while employers want to be viewed as 'family friendly,' they believe taking steps to reduce dependent costs are necessary in order to continue to provide affordable coverage for their workers," said Bob Tate, chief health care actuary at Hewitt, in the announcement. "At the same time, companies realize that cost-shifting is not a sustainable long-term strategy for reducing health care spend, and they are moving beyond health and wellness strategies that focus solely on employees to ones that emphasize their entire covered population, which may include spouses, children, and other dependents."