Health Care Costs a "Chronic Problem"

September 28, 2005 ( - The cumulative effect of years of double-digit increases has produced a record high for employer-sponsored health care costs in America, according to a Towers Perrin news release.

In its news release on the 2006 Towers Perrin Health Care Cost Survey, the HR services company said the gross health care expenditure in 2006 is expected to rise by an average of $597 per employee, to an average total cost of $8,424, which represents a 140% increase over the last 10 years.

Employees on average will pay $155 more in 2006, a 10% increase from 2005, while employers will see an increase of $442 per employee, 74% of the total cost increase. “The health care cost crisis has become a chronic problem for US employers and employees alike,” said David Guilmette, Managing Director of Health and Welfare for Towers Perrin, in the release. “There is a fundamental tension between managing costs and managing people that constrains how much of the cost can be shifted to employees.”

According to Towers Perrin, over the past five years employees’ portion of health care costs has risen 64%, while employers’ costs have risen 78%. Cost-shifting to employees has much to do with the employees’ cost increase, but the Tower Perrin survey shows that employers are recognizing that they need to find other avenues to control costs. In the 2006 survey, the bulk of the increase in the dollar amounts contributed by employees is due to inflation on their share of the premium, with less impact coming from cost-shifting.

Also Affecting Retirees

While the cost-shifting trend seems to be slowing down, it is still going on, and retirees under age 65 are seeing the bulk of its effect.

According to the news release, the total cost for retirees under age 65 is the highest in the survey: $562 per month for retiree-only coverage ($6,744 annually) and more for coverage that includes dependents. The rate of cost increase for this group is 10% versus 8% for active employees.

Overall, employees will contribute 18% of the premium cost for employee-only coverage and 21% for dependent coverage which relates to an average of $63 a month ($756 annually) for employee-only coverage and $217 a month ($2,604 annually) for family coverage in 2006. Retirees will contribute approximately 46% of the total cost of their coverage. Retirees under 65 will pay an average of $244 a month ($2,928 annually) for retiree-only coverage, while retirees age 65 and older will pay an average of $108 a month ($1,296 annually) for retiree-only coverage.

The company notes in the release that the Medicare Modernization Act, with Medicare Part D effective in 2006, will likely change the makeup of employer-sponsored medical coverage for retirees.Eighty three percentof the survey respondents who offer retiree medical say they will provide prescription drug coverage at least as rich as Medicare’s new program and take the federal subsidy offered to employers who provide this benefit.

Towers Perrin did find in its study that employers are trying to aggressively manage costs. According to the release, the $597 per employee increase would have been close to $750 per employee except that employers are managing program performance through vendor selection and performance management, prescription drug expenditures, care management, employee engagement and other initiatives.

Differences found in companies in the lower third for premium costs to employees and the higher third for costs included:

  • consolidated vendors or implemented enhanced vendor performance standards/service levels,
  • cost differences between brand name prescription drugs and generics, encouraging employees to use the lower cost alternative,
  • differentials between primary care and specialist copays for the employee,
  • communicating more effectively to employees about health care costs, providing decision support tools, and encouraging them to understand and manage their health risks.

The Towers Perrin 2006 Health Care Costs Survey was conducted during August and September 2005, and included 204 respondents from primarily Fortune 1000 companies.