Although down from an average increase of 14% for 2003, the 2004 increase of 10.5% is sharply higher than the US Consumer Price Index of 3.3%. To make matters worse, medical premiums are expected to increase by about 10% again for 2005, according to the 2004 Hay Benefits Report, a cross-industry survey of over 1000 US companies.
Stated in terms of payroll, employer costs for health benefits have risen steadily over the past four years from 7.28% in 2000 to 7.84% in 2002, and to 8.75% in 2004. Companies not able to absorb the medical cost increase this year or next would have to reduce medical benefits, reduce salary increases, reduce staff, or lower some other costs.
By plan type in 2004, Health Maintenance Organization (H MO) premiums increased 14.75% and Point of Service (POS) plan premiums increased 13.25% compared to 9% for Preferred Provider Organization (PPO) plans. This is probably due to HMO and POS plans easing up on approving referrals in response to litigation and consumer and government pressures.
Hay attributes the escalating medical cost to a number of different factors:
- reimbursement rates to hospitals and physicians are on the rise
- continuously improving medical technology, which allows very sick people to live longer, and incur significant medical expenses
- prescription drug costs increasing at a rate exceeding 15%
- the aging of the workforce.
Employees are also feeling the pinch of the higher costs. For example, m any companies pay a fixed percentage of the premium, so when average premiums rise 10%, then employees’ costs rise 10%. In addition, companies have been increasing employee deductibles, co-payments, and the limit at which employees’ “out-of-pocket” expenses are capped, Hay said.
Employers have also increased employee co-payments for doctor visits, with the number of plans with co-pays of $15 or more rising from 47% in 2002 to 72% in 2004. Moreover, 30% have co-pays of $20 or more in 2004. Co-payment increases were not restricted to doctor visits, as c ompanies have also raised employees’ prescription drug co-payments. The typical co-pay for generic drugs doubled in the last two years from $5 to $10. Most of prescription plans now use a “formulary,” a list of preferred lower-cost brand drugs with lower-dollar co-pays for employees than non-formulary brand drugs. The typical formulary co-pay is $20 in 2004, up from $10 two years ago, while the median non-formulary co-pay is $30 up from $15 two years ago.
Health Reimbursement Accounts (HRA) and Health Savings Accounts (HSA) along with “high deductible” plans are also emerging as a cost containment strategy. Eleven percent of companies report offering as an option an HRA, high-deductible plan, or both. Typical employee participation in these options is reported at less than 10%. New in 2004, less than 10% of companies are expected to adopt HSAs for 2005.