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Group health care costs rise modestly due to cost shifting and slow economy

Employees put off medical procedures to save money

Rising Group Health Care Costs

Group health care plan costs continue to increase modestly with no sign that premiums will spike again anytime soon.

In 2013, group health care premiums for family coverage increased just 3.8%, rising to an average of $16,351 per employee, according to a Kaiser Family Foundation survey of more than 2,000 employers released last week.

That 3.8% increase is the fourth time during the past five years that annual premium increases have remained less than 6%. During that five-year period, cost increases moved out of the 3% to 5.5% range only in 2011. That year, group health care costs increased an average of 9.5%, which Kaiser President and CEO Drew Altman said at the time was an “aberration” and some Obama administration officials attributed the increase at least in part to insurers' miscalculations on the effect of the health care reform law.

With cost increases running well below 5% in 2012 and 2013, “The critics will have a much harder time blaming big premium increases in employer insurance on Obamacare ... because there aren't any big premium increases,” Mr. Altman said last week at a news briefing.

Benefits experts say there are several key reasons why cost increases have remained modest even as employers have had to beef up their health care plans, such as offering coverage to employees' adult children up to age 26 to comply with health care reform requirements.

The most significant factor keeping cost increases in check is the sluggish economy, experts say.

“The economy still is flat on its back. Employees feel they can't afford to use more services,” said Helen Darling, president of the National Business Group on Health in Washington.

“As Americans have faced economic pressures, they have put off using medical services and that certainly has helped to keep costs in check,” said Tracy Perez, an account executive and vice president in the Denver office of Lockton Cos. L.L.C

Employer health plan design changes, such as significantly increasing employee cost-sharing by imposing higher deductibles, also have cooled demand for health care services as well as made employees more careful consumers of services.

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“When employees have more skin in the game, they learn to be better consumers, and that has helped to dampen health care inflation,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

Mercer L.L.C. statistics illustrate the growing prevalence of health plans that expose employees to more costs than traditional plans. For example, last year, 15% of employees working at large organizations — those with at least 500 employees — were enrolled in high-deductible, consumer-driven health care plans. That is more than double the 7% of employees who were enrolled in such plans in 2008.

And the percentage of employees enrolled in these high-deductible plans is likely to go much higher, especially as employers make them the only health plan design they offer.

“I think we will see a huge increase in CDHPs,” said Tracy Watts, senior partner in Mercer's Washington office.

These plans not only expose employees to more costs, they also carry much lower premiums compared with more traditional plans, because of their high deductibles. For example, the average premium for family coverage through such a plan was nearly $1,500 less this year than family coverage through a preferred provider organization (see chart).

At the same time, employers are exploring new approaches to help keep cost increases in check.

“Employers are getting more creative,” said Dave Ratcliffe, a principal in the Washington office of Buck Consultants L.L.C.

In recent years, one popular strategy employers have utilized to try to hold down costs is to give employees a financial incentive to have various medical screenings to detect medical problems before they develop into expensive complications.

In a twist on that strategy, some employers now are making employees pay higher premiums if they don't have certain screenings or take other steps to improve their health.

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“It is a 'stick' approach. It is a form of cost-shifting to try to change behavior,” Mr. Ratcliffe said.

“You will pay more if you don't play by the rules,” said Tim Nimmer, chief health actuary with Aon Hewitt in Denver.

Consultants say other cost-control strategies that are expected to grow over the next few years include providing greater coverage of services received by the most cost-efficient providers in a network and reference pricing, in which an employer limits the coverage it will provide for a service to a fixed amount.

Still, there is one ultimate cost-control step that few employers appear willing to take: eliminate their health care plans, direct employees to public exchanges and bump up employees' salaries to offset, at least partially, the premiums they will pay for coverage.

Last week, a Towers Watson & Co. survey of 420 large and midsize employers reported that 98% of respondents intend to continue to provide health coverage.

“Health care plans are a key part of employers' rewards package. No one wants to be the first to do something so radical” as eliminating coverage, said Mark Olson, a senior Towers Watson consulting actuary in Boston.

“I do not have one client who plans to drop coverage and have not heard of one who will drop coverage,” Lockton's Ms. Perez said.

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