Double Digit Healthcare Costs in 2001 – Again

October 24, 2000 ( - Employers should be planning for a 10-13% increase in healthcare costs next year, the third year of double-digit increases in a row. Employers may finally be ready to pass some along to employees, according to two new surveys.

The M&R 2000 HMO Survey by Seattle-based consultant Milliman & Robertson projects a 12% hike in health maintenance organization premiums next year, on top of a 5-10% increase this year based on responses from a third of the nation’s health maintenance organizations (HMOs). 

Comparable projections come from Hewitt Associates, with average healthcare increases of 10-13% in 2001, compared with a 9.4% overall rise this year.  Next year HMO costs are expected to rise another 13%, with preferred provider organizations (PPOs) up an estimated 10% and traditional indemnity plans up 12%.

Hewitt projects that the average health plan will cost $4,707/employee next year, up from $4,222 in 2000.  Hewitt also projects that employers will pass along at least 25% of the increase to employees.

HMO rates have increased 5-10% every year since 1998 after remaining relatively flat from 1994 through 1997.

HMO Profits Slip

Despite the increases, HMO profitability as a percentage of premium revenue was negative for the fourth year in a row, with an average loss in net income equal to 1.4% of premium revenue in 1999 according to the M&R survey.

Hospital days per 1,000 of insured members, a measure of the single largest HMO expense category, have dropped 4.2% to 230 days/1000 members in 2000, but average hospital charges per day have increased by 10%.

Physician reimbursement increased by roughly 4% this year as HMOs reported a 3.4% decrease in physician reimbursement relative to Medicare fee schedules. Medicare increased fee levels by roughly 8% in 2000.

HMOs also reported an increase in prescription drug costs of 27.8% over 1999 to $24.61/month per member.

Respondents to the M&R survey indicated that HMOs had:

  • reduced member benefits through increased member copays
  • shifted from flat to multi-tiered copays
  • identified and counseled physicians with abnormal prescription patterns and,
  • shifted some of the cost risk to physicians (in some cases)

The survey includes responses from more than one-third of the nation’s HMOs.