Employers Rely on New Health Cost-Containment Programs

November 20, 2006 (PLANSPONSOR.com) - With annual cost hikes slowing on an average per-employee total health cost basis and fewer employers cost-shifting to their workers, organizations will need other cost management techniques to keep the increase rate steady or cut it further.

That was the conclusion of the latest National Survey of Employer-Sponsored Health Plans, by Mercer Health & Benefits, according to a Mercer news release.

The survey found total health benefit costs rose by 6.1% in 2006, which was the same as last year, to an average of $7,523 per employee, the release said. This represents the end of a three-year period in which employers were able to dampen the rate of health benefits growth, which hit a 12-year high of 14.7% in 2002. Employers predict another 6.1% increase in average cost for 2007.

As have other similar polls, the Mercer survey found a difference in cost increases among varying sizes of employers. Employers with fewer than 500 employees saw their health expenses go up by 7% in 2006, which was a faster rate than last year.Rising rates for fully insured plans, which are most commonly offered by small employers, also provided upward pressure on cost in 2006.

In 2006, cost-shifting to employees was less of a factor in reducing health benefit cost increases than in past years, Mercer found. Average deductibles, copays and out-of-pocket maximums, which rose rapidly from 2000 to 2005, showed only modest growth last year, according to Mercer’s data.

“So, the multi-million-dollar question for employers is: If cost growth in health benefits has stopped slowing, will it now start to accelerate?” said Blaine Bos, a worldwide partner at Mercer Health & Benefits and one of the study’s authors, in the news release. “With less cost-shifting to employees going on, we’ll see how well the leading-edge strategies for longer-term cost management – care management and consumerism – are working.”

Strategies for cost management used in 2006 included health risk assessments – now offered by 22% of all employers and 53% of large employers – and employee incentives to use care management, according to Mercer. Survey results suggest that employers are increasingly able to measure a return on their investment (ROI) in care management. Nearly a fourth of all large employers, and half of those with 20,000 or more employees, have attempted to measure ROI on various care management programs. Of those, the great majority – 79% – are satisfied or very satisfied with ROI.

Asked to rate the importance of six cost management strategies to their organization over the next five years, care management and consumerism were each rated important or very important by 43% of all employers (and about two-thirds of those with 500 or more employees). Only 31% of all employers (37% of large employers) believe shifting cost to employees or scaling back benefits will play an important role in controlling cost in the near future.

Mercer found enrollment in consumer-directed account-based health plans, the least expensive type of medical plan by far, is increasing. As employees shift from more expensive plans into less expensive ones, the average cost per employee drops.

The percentage of all employers offering a consumer-directed health plan (CDHP) based on either a health reimbursement account (HRA) or a health savings account (HSA) tripled in 2006, from 2% to 6%.

Growth was also strong among larger employers.CDHP offerings rose from 5% to 11% among employers with 500 or more employees, and from 22% to 37% among jumbo employers (20,000 or more employees), the first to embrace the model. Nationally, enrollment in CDHPs jumped from 1% to 3% of all covered employees.

CDHPs delivered substantially lower cost per employee than either PPOs or HMOs in 2006. CDHP cost averaged $5,770 per employee, compared to $6,616 for HMOs and $6,932 for PPOs (or $6,019 for PPOs with comparable deductibles of $1,000 or more). The average CDHP cost is 5.3% higher than last year's average cost of $5,480.

On average, HSA-based plans cost 19% less than HRA-based plans in 2006, $5,005 compared with $6,214, respectively. For employees, the lower cost has meant a lower monthly premium contribution: $41 per month for employee-only coverage in an HSA plan, compared to $56 for coverage in an HRA plan. (For comparison, the average PPO contribution was $85 per month; the average HMO contribution, $76.)

Near-term, 14% of small employers say they are very likely to offer a CDHP in 2007, including those who currently offer one; this figure rises to 16% for 2008. This represents a significant increase from the 5% of small employers offering a CDHP today.

While CDHPs initially grew fastest among larger employers, survey results indicate a cooling trend for the next two years. Among employers with 500 or more employees, CDHP offerings are predicted to rise from 11% this year to 14% in 2007 and 19% in 2008. Among jumbo employers, where CDHPs have been embraced the most enthusiastically, growth will be modest, from 37% this year to 39% in 2007 and 43% in 2008, according to Mercer.

Medicare Part D

Perhaps in response to the new Medicare Part D prescription drug benefit, the percentage of large employers providing a medical plan for Medicare-eligible retirees on an ongoing basis dropped from 21% to 19% in 2006. An additional 10% provide coverage to a closed group of current or future retirees, but do not offer coverage to new hires.

Survey results suggest that many large retiree plan sponsors changed their approach to providing coverage to their Medicare-eligible retirees in 2006 as they took more time to react to the introduction of the Medicare Part D benefit. Last year, 43% continued to provide coverage to retirees without seeking a subsidy, perhaps because of the difficulty or expense of performing the tests required to receive it. By 2006, this figure had fallen to just 25%. Conversely, sponsors receiving the subsidy rose from 44% to 51%, and more employers also chose to provide coverage that wraps around a prescription drug plan (PDP) - 13%, up from just 4% last year.

The Mercer National Survey of Employer-Sponsored Health Plans had nearly 3,000 employer participants and was conducted during the late summer of 2006. Results represent about 600,000 employers and more than 90 million full- and part-time employees.

The full report will be published in late March 2007. The report costs $500 and the report and tables cost $1,000. Copies of the report and tables may be pre-ordered online at http://www.MercerHR.com/ushealthplansurvey or by calling Tara Lewis at 212-345-2451.