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HELATH CARE COSTS UP 2.5% IN 1996

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Health care plan costs in 1996 remained fairly stable, though larger cost increases may lie in store for some employers this year.

Group health care costs for active and retired employees rose 2.5% to an average of $3,915 per employee in 1996 from $3,821 per employee in 1995, according to a survey of 3,290 employers to be released this week by benefit consultant A. Foster Higgins & Co. Inc. of New York.

Health care costs for active employees and retired workers at large employers-those with at least 500 employees-climbed slightly more, increasing 3.6% to an average of $4,332 per employee from $4,181 per employee.

On the other hand, health care costs among smaller employers fell 2% to an average of $3,380 per employee from $3,448 as more workers at smaller companies moved into lower-cost managed care plans.

Looking at only active employees, health care costs for all employers surveyed increased just 1.4%, rising to an average of $3,703 per employee, up from $3,653 in 1995.

These small increases in health care costs-the third year in a row of relatively stable costs-are good news for employers, which in the late 1980s were reeling from the blows of double-digit annual increases in health care premiums and claims' costs.

"All in all, this has been a very favorable year on the health care cost front for employers," said John Erb, a principal in the Miami office of Foster Higgins.

There are many signs, though, that this run of health care cost stability is nearing an end, Mr. Erb added.

For example, the wave of hospital mergers in many areas of the country ultimately could shift the balance of negotiating power to providers and away from managed care organizations and other buyers.

"The next contract negotiated between a hospital and a managed care organization may not be as favorable as the last one. While provider consolidation has not been happening everywhere, where it has could be the next tripwires of renewed cost increases," Mr. Erb said.

Even before the fallout from provider consolidation is felt, health maintenance organizations are again raising rates. Many HMOs that froze or lowered rates over the past three years are-in the wake of deteriorating financial results-boosting rates, typically by 2% to 6% in 1997.

In addition, managed care may be nearing its saturation point. The huge savings employers have seen over the past few years as droves of employees moved to less costly managed care plans from high-cost traditional indemnity plans may be nearly over because most employees have made the shift.

"The best way to achieve savings is to get employees to move from traditional indemnity plans to managed care plans. That shift has happened," Mr. Erb said.

While health care premiums and costs are likely to edge up this year, survey respondents do not expect a return to the health care budget-busting days of the late 1980s.

Surveyed employers predict health plan rates and costs this year will increase by an average of 4%, higher than recent years but a far cry from the late 1980s, when 15% to 20% cost increases annually were the norm.

That is because today the vast majority-77%-of employees are enrolled in managed care plans that have been able to keep cost increases in check. By contrast, a decade ago, most employees were enrolled in traditional indemnity plans, which were unsuccessful at holding down costs.

"Managed care has and is working," Mr. Erb said.

Indeed, one type of managed care plan-traditional HMOs-not only is the least expensive of the four major types of health care plans, but also has been the most successful in keeping costs under control.

In 1996, HMOs were the only type of health care plan for which costs actually fell compared with 1995. HMO costs declined 2.2% to an average of $3,185 per employee from $3,255. HMO costs also declined a year ago, falling by an average of 3.8% (BI, Jan. 29, 1996).

Cost increases for the three other major types of health care plans-preferred provider organizations, point of service plans and traditional indemnity plans-were modest, Foster Higgins found.

For example, traditional indemnity plan costs increased 2.4% to an average of $3,739 per employee from $3,650, while POS plans' costs rose 2.3% to an average of $3,494 per employee from $3,415. PPOs' costs increased 3.9% to an average of $3,293 from $3,169.

While traditional HMOs are by far and away the lowest-cost health plan, enrollment in the plans has stagnated at 27% between 1995 and 1996. By contrast, POS enrollment leaped to 19% of employees from 14%, while PPO enrollment climbed to 31% from 29%. Enrollment in traditional indemnity plans fell to 23% of covered employees from 29%.

Mr. Erb says even if employees don't actually seek services outside a PPO or an HMO network, they want that option.

That freedom to choose-even if not exercised-is leading many HMOs to offer POS products. In fact, from 1993 to 1996, enrollment in POS plans nearly tripled to 19% from 7%. By contrast, during this same three-year period, enrollment in traditional or closed-end HMOs increased much more slowly to last year's 27% level from 19% in 1993.

The popularity of different health care plans varies considerably by region.

In the West, for example, where the HMO movement began, traditional indemnity plans now are virtually dead. They cover just 11% of eligible employees.

In the West, HMOs are the dominant health care plan, enrolling 39% of employees, while PPOs enroll 35% and POS, 15%.

By contrast, in the Northeast-once the last bastion of traditional indemnity plans-POS plans now dominate and cover 38% of employees, while traditional indemnity plans and HMOs each cover 23% of employees and PPOs cover 16%. As recently as 1993, traditional indemnity plans covered 66% of employees, but since then Northeast employers in massive numbers have turned to managed care to bring down health care costs, which still are the highest in the country at an average of $4,161 per employee.

In the South, where HMOs have been slower to develop, PPOs are the most popular health care plan and cover 40% of employees. Twenty-five percent of employees are in traditional indemnity plans, while 23% are in HMOs and 12% are in POS plans.

In the Midwest, though, no one type of health care plan is dominant. About one-third of employees are in PPOs, 29% are in traditional indemnity plans and 24% are in HMOs. POS plans, though, have been the fastest-growing type of health care plan in the Midwest, with enrollment surging to 14% in 1996, up from just 5% in 1993.

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

For active employees, traditional indemnity plan costs in 1996 increased 6.6% and averaged $3,928 per employee, up from $3,686.

Traditional indemnity plan costs were highest among employers in the Northeast, averaging $4,379 per employee, up 3% from $4,252 in 1995.

Traditional indemnity plan costs were lowest in the West, averaging $3,345 per employee, up 5.3% from $3,176.

In the Midwest, traditional indemnity plan costs averaged $3,916, up 8.8% from $3,598. Traditional indemnity plan costs in the South averaged $3,381, up 4.4% from $3,239.

POS plan costs averaged $3,584 per employee in 1996, a 0.3% increase from $3,572 in 1995.

POS plan costs were highest among large employers in the Northeast, averaging $3,677 per employee, up 0.4% from $3,664. POS costs were lowest in the Midwest, averaging $3,451, up 0.2% from $3,443.

POS plan costs in the West averaged $3,587 per employee, up 1% from $3,552, while POS costs in the South averaged $3,455, a 1.1% decrease from $3,493.

PPO costs among large employers averaged $3,434 per employee in 1996, a 5.9% increase from $3,242 in 1995.

Northeast employers had the highest PPO costs, at an average of $3,739 per employee, up 1.5% from $3,684. Southern employers had the lowest PPO costs, at an average of $2,997 per employee, up 6.6% from $2,812.

PPO costs among Midwestern employers averaged $3,700 per employee, up 2.7% from $3,602. Western employers' PPO costs averaged $3,600, up 5.6% from $3,410.

HMO costs for large employers in 1996 averaged $3,350 per employee, down 1.8% from $3,410.

Large Northeastern employers had the highest HMO costs, at an average of $3,759 per employee, down 3.3% from $3,886, while Southern employers had the lowest HMO costs, at $3,009 per employee, up 2.5% from $2,935.

In the Midwest, HMO costs averaged $3,380 per employee, up 0.7% from $3,356, while in the West HMO costs averaged $3,140, a decline of 3.4% from $3,252.

Thirty percent of employers pay the full premium for traditional indemnity plan for employees' single coverage, while 14% pay the full premium for family coverage.

Among plans that require contributions, employee contributions for single coverage average $43 a month, or 24% of the total premium. For family coverage, employees pay an average of $133 a month, or 32% of the premium.

Sixty-five percent of large employers say rates charged by their HMOs are lower than those charged by their PPOs or traditional indemnity plans, while 18% say the rates charged by the three plans are about the same, and 17% say HMO rates are higher than PPO or traditional indemnity plan rates.

On average, employers offer five HMOs.

Fifty-two percent of employers in 1996 offered a traditional indemnity plan, down from 54% in 1995.

Six percent of large employers offer health care coverage for employees' same-sex partners.

Copies of the "Foster Higgins National Survey of Employer-Sponsored Health Plans, 1996" will be available Feb. 24 from Tara Lewis, A. Foster Higgins & Co. Inc., 125 Broad St., 4th Floor, New York, N.Y. 10004; 212-574-9025. The cost is $500, and prepayment is requested.