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HEALTH PLAN COSTS REMAINING STABLE

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The dramatic slowdown in group health care costs is no fluke.

For the second year in a row, the cost of group health care plans remained virtually flat, a new survey shows.

Group health care costs for active and retired employees rose 2.1% to an average of $3,821 per employee in 1995 from $3,741 per employee in 1994, according to a survey of 2,764 employers to be released this week by benefit consultant A. Foster Higgins & Co. Inc. of New York.

Looking at group health care costs just for active employees, the study found a negligible 0.2% increase in 1995 to an average of $3,653 per employee from $3,644. The new study marks the first time that Foster Higgins formally separated active and retired workers' health care expenses.

Last year's stability in group health care costs follows a 1.1% decline in group health care costs in 1994 (BI, Feb. 13, 1995).

And as 1996 begins, employers can expect health care costs to remain stable or even decline. Many health maintenance organizations, for example, are either cutting or holding the line on rates (BI, Dec. 11, 1995).

What could become at least a three-year stretch of health care cost stability is in stunning contrast to the late 1980s, when the annual story was one of double-digit increases in health insurance rates and claims costs.

"Only a few years ago, few people would have thought that costs would be virtually flat two years in a row," said John Erb, a principal in the Miami office of Foster Higgins.

The main reason that group health care costs are stable is the continuing shift of employees into lower-cost managed care plans and out of expensive traditional indemnity plans.

Surveyed employers reported that 71% of active employees were enrolled last year in managed care plans, up from 63% in 1994, while enrollment in traditional indemnity plans fell to 29% from 37%.

With the annual cost of traditional indemnity plans between roughly $400 and $500 per worker higher than health maintenance organizations and preferred provider organizations-the two fastest growing types of managed care plans-the ongoing shift of workers to managed care plans means big cost savings for employers.

"There has been a fundamental restructuring of the health care system with a large scale replacement of traditional indemnity plans with managed care plans. Employers are now harvesting the fruits-lower costs-of that restructuring," Mr. Erb said.

The continuing shift to managed care plans comes at a time when the plans are aggressively competing for business-especially that of employers with less than 500 employees-and in many cases are cutting rates.

Indeed, for the first time in the 10-year history of the survey, group HMO costs fell, declining 3.8% in 1995 to an average of $3,255 per active employee from $3,385. For small employers, which many HMOs are aggressively courting, costs plunged 11.9% to an average of $2,883 per employee in 1995 down from an average of $3,274 in 1994.

"HMOs are increasingly targeting smaller employers, and among this group they compete almost solely on the basis of price," the survey notes.

PPO costs also fell last year, declining 2.1% to an average of $3,169 per employee from $3,238 a year earlier. That cost decrease was fueled mainly by a 4.8% drop in costs in the South, where competition among PPO vendors is especially intense, Foster Higgins says.

Because PPO enrollment in the South is so high-36% of all PPO enrollees are in the South-changes in PPO costs in the South significantly influence the national average.

Bucking the cost trend among managed care plans was point-of-service plans, whose costs increased 3.4% in 1995 to an average of $3,415 per employee from $3,302.

Slight reductions in POS plan costs in three of four geographic regions were offset by a 10.9% increase in POS costs in the Northeast. That increase may be because many employers in the Northeast only first started to offer a POS plan in 1994, according to Foster Higgins. As a result, employees' use of cost-effective network providers, which typically grows over time, was below average in these new plans. Just 53% of Northeast employers with more than 500 employees that offer POS plans reported that at least 80% of their total claims dollars went to network providers compared with 61% of companies nationally.

Traditional indemnity plan costs-the most expensive health care program-increased 4.4% rising to an average of $3,650 per employee in 1995 from $3,496.

While traditional indemnity plans will never entirely disappear-managed care networks are difficult to establish in many sparsely populated areas of the country-enrollment in indemnity plans could dwindle to as little as 20% of employees, Mr. Erb predicts.

In 1995 alone, the percentage of employers offering a traditional indemnity plan dropped to 54% from 60%, while the percentage offering a PPO leaped to 49% from 40% and the percentage offering an HMO climbed to 57% from 53%. And, 28% of employers offered a POS plan, up from 25%.

Of the employers with at least 500 employees offering HMOs, 44% of their eligible employees were enrolled in HMOs last year, up from 38% in 1994.

The leading reason for obtaining an indemnity plan-cited by 40% of employers-was because they couldn't find suitable managed care networks in all employee locations. By contrast, just 16% of employers said they offer an indemnity plan because they are committed to full provider choice, while another 16% believe a traditional indemnity plan is necessary to attract employees.

Although many employers once were skeptical about the savings they could achieve from managed care plans, especially HMOs, that skepticism has largely dissipated in the face of a continued gap between the costs of indemnity plans and HMOs.

Last year, 81% of large employers-those with at least 500 employees-said their HMOs were effective in controlling their health care costs, up from 68% in 1994, while 31% of large employers said they encouraged enrollment in HMOs, up from 24% in 1994.

"Managed care is working and employers know it," Mr. Erb said.

In addition, employees have come to believe that the lower cost-sharing requirements in managed care plans are an acceptable tradeoff for less freedom to choose providers, Mr. Erb said.

"They accept less choice in favor of lower out-of-pocket expenses," he said.

The difference in out-of-pocket expenses between traditional indemnity plans and HMOs is dramatic. HMOs, for example, don't impose deductibles, while employees in traditional indemnity plans often are slapped with big deductibles: last year, the median deductible among large employers was $200 for individual coverage and $500 for family coverage.

Among employers with at least 500 employees, the cost of the four major types of health care plans was highest in the Northeast, while employers in the West had the lowest cost traditional indemnity plans and employers in the South had the lowest cost HMOs and PPOs. Employers in the Midwest had the lowest cost POS plans.

Traditional indemnity plan costs for large Northeast employers averaged $4,252 per active employee, up 6.5% from $3,992 in 1994. By contrast, traditional indemnity plan costs for employers in the West averaged $3,176, up 1.5% from $3,128.

PPO plans costs in the Northeast averaged $3,684 per employee, up 2.6% from $3,588 in 1994. PPO plan costs for Southern employers averaged $2,812 per employee, down 4.7% from $2,951 in 1994.

The cost of Northeast employers' HMOs averaged $3,886 per employee, up 4.8% from $3,700. HMO costs among Southern employers averaged $2,935, down 9.5% from $3,213.

The cost of Northeast employers' POS plans averaged $3,664 per employee, down 1% from $3,700. POS plan costs averaged $3,443 per employee in the Midwest, up 5.5% from $3,262.

Other survey findings involving employers with at least 500 employees include:

On average, employees in HMOs paid 22% of the premium for individual coverage and 35% of the premium for family coverage. Employees in traditional indemnity plans paid 23% of the premium on average for individual coverage and 33% of the premium for family coverage.

In traditional indemnity plans, 70% of employers self-fund the plans, including 59% that self-funded with stop-loss insurance and 11% that self-fund without any stop-loss coverage. In addition, 11% of large employers fully insure their traditional indemnity plans, while 15% utilize experience-rated plans and 5% purchase minimum premium plans.

Thirty-four percent of large employers with self-insured traditional indemnity plans use a commercial insurance company to administer the plan, while another 34% use an independent third-party claims administrator and 25% use a Blue Cross/Blue Shield plan as their TPA. Just 7% of employers self-administer their traditional indemnity plans.

Just over half of employers say their flexible benefit programs have helped to reduce health care costs, while 31% say the plans have had no effect and 14% said the effect on costs cannot be measured. Three percent of employers said flexible benefit plans increased health plan costs.

Copies of the "Foster Higgins National Survey of Employer Sponsored Health Plans" will be available next month from Lisa Gilleeny, A. Foster Higgins & Co. Inc., 125 Broad St., New York, N.Y. 10004; 212-574-9025. The cost is $500 and prepayment is requested.