Health-Care Cost Increases Down Slightly in 2004

March 18, 2004 ( - The pace of health-care cost increases is expected to be 12% this year, down marginally from 13% last year.

Health-care cost hikes were not uniform though, Watson Wyatt and the National Business Group on Health (NBGH) found in their survey of 449 employers. There was a 10% differential between “high performers” – those companies encouraging workers to take responsibility for health-care decisions – and “low performers” – companies doing less to engage workers to make cost-effective health-care decisions. Whereas low performers were looking at median cost increases of 17% between 2003 and 2004, high performers are projected to have a much more manageable 7% increase.

“A difference of 10% points is hard to ignore,” Ted Chien, global director of group and health care consulting at Watson Wyatt said in a news release. “The results of this study strongly suggest that employers with programs that encourage employees to be more responsible for their health care decisions are beginning to reap the rewards. Also, the study shows that the years of attempting to control costs using traditional methods are over.”

For example, the median cost increases in 2004 for different plan types narrowed dramatically. At the low end of the scale are point-of-service plans (POS) projecting a 12% median cost increase, followed by 13% rises in preferred provider organizations (PPO) and 14% hikes in Health Maintenance Organization plans (HMO) and Indemnity plans. This lack of differentiation makes it extremely difficult for employers to reduce increases in demand by using the traditional strategy of switching plan type, the study found.

Additionally, the number of employers that are attempting to contain costs through changes in plans or vendors has dropped sharply. Only one out of 10 employers changed medical vendors in 2003, compared to three out of 10 in 2002. Similarly, fewer than one out of 10 employers switched pharmacy vendors last year, compared with 23% the previous year.

“Employers are beginning to recognize there’s a new reality that requires new choices,” Helen Darling, president of the NBGH said in the release. “Employers and employees must work together to control health benefit costs. The only viable way for employers to break the log jam may be to help workers become more educated consumers of health care.”

And employees are become more interested in health-care choices as they begin seeing more of the costs hit their paychecks. While this year 29% of companies are will to absorb the cost increases, the number is down significantly from more than half (52%) of the respondents willing to do the same in 2000. This may have to do with the continued double-digit cost hiking taking the toll on the corporate budget – 41% of those polled said their health-care benefit costs were over budget last year.

Hope is not lost for the plan sponsor looking to reign in costs and employee spending. The study points to those high performers that have already done this by increasing financial tension, providing employees with access to information and tools and incorporating value purchasing principles into their program. Specifically, the high performers in the study turned to:

  • Using high-deductible plans with a reimbursement arrangement
  • Putting money in a flexible spending account to promote improvements in personal health
  • Implementing lifestyle behavior change programs separately from the health plan
  • Providing information on specific health issues and concerns
  • Moving to an employee self-service environment
  • Believing in the importance of providing employees with access to tools to manager their health
  • Factoring quality information in vendor selection and contracting.

“We are also seeing more employers providing employees with information and tools that will not only help them make better health care purchasing decisions, but also coach them in the use of the health care system and support them in their efforts to improve their personal health,” said Darling.