The double-digit increase in 2004 follows an identical 15%-increase in 2003. Following this trend, as a percentage of total payroll expense, employer costs for health benefits have risen steadily from 7.3% in 2000 to 7.8% in 2002, and then jumped a full percent to 8.8% in 2003, according to the 2003 Hay Benefits Report, a cross-industry survey of over 1,000 US companies.
Hay attributes the rising cost of medical expenses to several factors. Among those is the rise in reimbursement rates to hospitals and physicians and that employers have shifted away from HMO-type plans that require primary care physician referrals for specialist visits and tests. In 2003, 57% of companies used a Preferred Provider Organization (PPO) as their primary plan, up from 40% four years ago.
This hits the bottom line in that unlike HMOs, PPOs do not require referrals and thus are more expensive. Additionally, HMOs are now less likely to limit care than in the past given the potential legal implications, again resulting in higher premiums.
“This is a very difficult time for companies to cope with double-digit medical premium rate increases,” Michael Carter, vice president in Hay Group’s benefits practice, said in a statement. “In the current business environment, most companies simply cannot afford to pass these costs along to their customers.” As a result, to maintain current levels of profitability, companies are likely faced with actions in other areas such as cutting back salary increases, staff reductions, shifting medical costs to employees, and exploring new strategies to contain rising medical costs.
Employees have definitely shouldered a larger brunt of their overall health-care costs, due to many companies only paying a fixed percentage of the premium. Thus, when average premiums rise 15%, then employees’ costs also rise 15%. Additionally, companies have been increasing employee deductibles, co-payments, and the limit at which employees’ “out-of-pocket” expenses are capped. In fact, co-payments have risen dramatically. The number of plans with co-pays of $15 or more rose to 57% in 2003, from 47% in 2002 and 33% in 2001.
Breaking it down to prescription drug plans, Hay found the typical co-pay for these plans doubled in the last two years from $5 to $10. Three quarters of prescription plans now use a “formulary,” a list of preferred lower-cost brand drugs with lower-dollar co-pay for employees than non-formulary brand drugs. The typical formulary co-pay is $20 in 2003; up from $10 two years ago, while the median non-formulary co-pay has reached $30, up from $15 two years ago.
Further, one third of companies now require the use of lower-cost generic drugs if available, unless otherwise specified by the physician. The use of mail order drugs for ongoing medication is also increasing in popularity (10% in 2002), as is the change from a fixed-dollar to a percentage-based co- payment (11% in 2003). This provides employees with more incentives to use generic and formulary drugs, and shifts part of drug cost increases to the employee.
Looking ahead to 2004, more cost shifting seems likely, Hay found. Much of this is due to a limit in the amount that companies can shift to employees, particularly lower paid employees. With the average annual employee premium contribution for family coverage reaching $2,150 in 2003, companies will need to rely on strategies other than cost shifting.
One such strategy employers are still picking up most of the tab for disease management programs. These voluntary programs focus on improving the health – thus controlling the costs – of common manageable diseases, including:
- congestive heart failure
- coronary artery disease
Hay also found Health Reimbursement Accounts (HRA) and “high-deductible” plans are also emerging to manage rising medical costs. This plan involves a company-funded HRA that employees can use for an IRS-approved health expense. Unused amounts can be carried over to the following year, in theory encouraging employees to become better health care consumers. Supplementing the HRA is a “high-deductible” plan, with typical annual deductibles ranging from $1,500 to $3,000 per individual.
However, the HRA idea is still in its infant stages with only 6% of companies offering an option an HRA or high-deductible plan. Typical employee participation in these options is reported at less than 10%.