Towers Perrin Survey Notes Healthcare Challenges, Strategies

A preliminary reading from the Towers Perrin 2003 Health Care Cost Surveyfinds that the cost of large employers’ health benefit plans will increase 15% on average in 2003 – the highest year-over-year percentage increase since Towers Perrin began conducting the survey   in 1989.

While the average increase is $830 per employee per year, employers won’t be carrying it alone.   According to the survey employees will pay 19% of their health care costs for employee-only coverage in 2003, compared to 17% in 2002.   Employees will be responsible for 22% of the costs for family coverage next year, compared to 21% in 2002.   In dollar terms, employees will contribute an average of $48 a month in 2003 for employee-only coverage (compared to $38 a month in 2002).   Employee contributions for family coverage will average $160 a month, compared to $134 a month in 2002.  

However, while cost sharing may reduce some of the strain in the short term, employers are exploring several long-term solutions to minimize the total cost, according to Ron Fontanetta, a principal in Towers Perrin’s New York office.   Among those solutions are:

• Care Management – a focus on chronic conditions that result in inordinate expense for a relatively small number of cases, coupled with implementing targeted programs to effectively manage these conditions.   On average, 15% of employees account for 75% of health care costs in a given year, according to Towers Perrin.   The survey’s authors note that some companies are carving this function out from the general plan vendor and using specialty organizations to deliver these programs, while others are working with the general plan vendor to reengineer this function.

• Consumerism – a growing number of employers are encouraging and enabling employees to be more effective purchasers of health care through plan design changes in current medical plans, as well as providing workers with access to tools and information that permit more informed decisions.   Communication strategies that educate employees about the cost, value and proper use of health care services are also increasing in use, according to Towers Perrin.

• Design and Delivery – aligning plan design and contributions to encourage enrollment in appropriate health plans and the cost-effective use of medical care.

• Vendor Management – by both updating the selection and current contracts with vendors, employers are making gains in both negotiated fees and performance standards.   In addition, the survey’s authors note a continued trend toward self-insuring HMOs.

• Data Management – monitoring utilization and cost data have allowed employers to identify short- and long-term design or plan management interventions.

One of the primary factors fueling the latest increase in health care costs is the renewal rates from HMOs, with an average HMO rate increase for active workers of 15%.   Retirees are confronting even steeper rates - more than 20%, on average.   "Employers are facing the highest increase in HMO renewals since the early 1990s," said Foreman.   

HMO rates are, in turn, being driven higher by the continued use of conservative underwriting assumptions and high core medical and pharmacy trends that continue "unabated", according to the report.   As a result, employers are considering new approaches in managing their prescription drug programs, particularly in the area of heavily advertised brand name medications, and the implementation of tiered co-pay structures, and moving to more restrictive formulary drug coverage."

The cost of employer-sponsored medical plans is higher for retirees under age 65 and Medicare-eligible retirees than for active employees.   Not surprisingly, drug costs make up a larger share of the cost for Medicare-eligible retirees, and drug cost increases have been greater than increases for other medical services in recent years.

Other factors leading to increased costs include:

• sharp increases in the price of hospital services,
• greater demand for more expensive diagnostic tests such as MRIs and cat scans, and
• higher utilization of certain physician specialists, especially in the areas of cardiology, gastroenterology and dermatology.

For active employees, the average reported 2003 cost of medical coverage for all types of health plans combined is:

• $266 per month ($3,192 on an annual basis) for employee-only coverage;
• $540 per month ($6,480 annually) for employee-plus-dependent and
• $768 per month ($9,216 annually) for family coverage.

According to the survey, dental costs for 2002 will increase by 6.7%.   Dental costs commonly represent 8-10% of a company's active health care costs.     

The Towers Perrin 2003 Health Care Cost Survey was conducted during August/September 2002.   The preliminary findings were culled from the first 268 responses to the survey, primarily Fortune 1000 firms.   The full survey is expected to be available in December 2002.