2011 Health Cost Hikes Highest in Five Years

September 27, 2010 (PLANSPONSOR.com) – Employers can expect an average 8.8% health coverage increase in 2011, up from 6.9% in 2010 and the highest level in five years, according to an analysis by Hewitt Associates.

A Hewitt news release said the estimate was driven by recent higher medical claim costs, an aging population, and changes brought about by health care reform.

According to the news release, the average total health care premium per employee for large companies will be $9,821 in 2011, up from $9,028 in 2010. The amount employees will be asked to contribute toward this cost is $2,209, or 22.5% of the total health care premium. This is up 12.4 % from 2010, when employees contributed $1,966, or 21.8% of the total health care premium.

Hewitt said average employee out-of-pocket costs, such as copayments, coinsurance and deductibles, are expected to be $2,177 in 2011—a 12.5% increase from 2010 ($1,934). According to the analysis, these projections mean that in a decade, total health care premiums will have more than doubled, from $4,083 in 2001 to $9,821 in 2011. Employees’ share of medical costs—including employee contributions and out-of-pocket costs—will have more than tripled, from $1,229 in 2001 to $4,386 in 2011.

According to Hewitt, a variety of factors are driving the increase in projected health care cost increases for 2011. Employers are seeing an increase in the amount of charges and frequency of catastrophic claims – particularly true today, as slower levels of hiring have left employers with slightly older workforces who are more prone to costly medical conditions. Hewitt estimates that the most immediate applications of health care reform—including covering dependents to age 26 and the elimination of certain lifetime and annual limits—contributed approximately 1% to 2% of the 8.8% projected increase for 2011.

“After 18 months of waiting for health care reform to play out, employers find themselves in a very challenging cost position for 2011,” said Ken Sperling, Hewitt’s health care practice leader, in the news release. “Reform creates opportunities for meaningful change in how health care is delivered in the U.S., but most of these positive effects won’t be felt for a few years. In the meantime, employers continue to struggle to balance the significant health care needs of an aging workforce with the economic realities of a difficult business environment.”

Bigger Increases in Some Areas  

In 2010, a few U.S. markets experienced rate increases significantly higher than the national average. Five major metropolitan areas in California, for example, experienced rate increases of 10% or higher: Los Angeles (10.2%), Orange County (10.6%), Sacramento (10.7%), San Diego (10.8%) and San Francisco (10.4%).

Other U.S. cities experiencing higher-than-average rate increases included Charlotte (9.7%); Newark, (10.8%); Philadelphia (10%); and Tampa (9.2%). Conversely, Columbus, Ohio (4.3%); Dallas/Ft. Worth (3.7%); Portland, (4.6%); and Washington D.C. (4%) experienced lower-than-average rate increases in 2010.

According to the announcement, in 2010, Hewitt saw average cost increases of 7.8% for health maintenance organizations (HMOs), 6.9% for point-of-service (POS) plans, and 6.3% for preferred provider organizations (PPOs).

For 2011, Hewitt forecasts that companies will have average cost increases of 8.5% for PPOs and POS plans and an average cost increase of 9.4% for HMOs. That means from 2010 to 2011, the average cost per person for major companies will increase from $8,671 to $9,408 for PPOs; $9,373 to $10,254 for HMOs; and $9,747 to $10,575 for POS plans.  

Employers Repond to Health Cost Pressures 

With the cost of providing health care benefits continuing to rise, employers continue to pass some of these costs to employees. In a recent Hewitt survey, "increasing employee cost sharing" was ranked by employers as one of their top five health care tactic priorities over the next three to five years. Workers may see employers passing along these costs in different ways, including shifting plan designs from fixed dollar copayments to coinsurance models, where employees pay a percentage of the out-of-pocket costs for each health care service and increasing deductibles, out of pocket limits and cost sharing for use of non-network providers.

An increasing number of employers are realizing they can significantly reduce health care costs by assessing the eligibility of covered dependents in their plans. About three-quarters of Hewitt’s health and welfare administration clients have conducted dependent audits in the past five years to assess the eligibility of covered dependents.  According to Hewitt's data, on average, 11% of people enrolled in an employer's health plan are ineligible. For a company with 10,000 enrollees, this can equate to millions of dollars in health care costs each year.

According to recent Hewitt research, disease management and health improvement programs continue to remain a top priority for employers. More than half (53%) of companies currently have a disease management/health improvement strategy. Of those that don’t, 11% plan to implement one in 2010 and another 75% plan to implement one in the next three to five years.

Also growing in popularity is employers’ willingness to use penalties and financial incentives as a way to increase employee participation in these programs. Hewitt’s recent survey of 600 large U.S. employers found that nearly one-half (47%) say they either already use or plan to use financial penalties over the next three to five years for employees who don’t participate in certain health improvement programs. Of those companies, most say they will do so through additional employee cost shifting, such as higher benefit premiums (81%), an increase in deductibles (17%) and an increase in out-of-pocket expenses (17 %).

Hewitt’s data is derived from the Hewitt Health Value Initiative database, which contains detailed census, cost, and plan design information for 350 large U.S. employers representing 14.4 million participants and $51.9 billion in 2010 health care spending.