HEALTH COST OUTLOOK NOT HOPELESS

ARE EMPLOYERS' HEALTH CARE COSTS headed for a return to out-of-control, double-digit increases?

Certainly, costs are edging up again. As we reported Jan. 20, group health care costs in 1996 increased an average of 2.5%, according to an annual employer survey by A. Foster Higgins & Co. Inc. That's a bit higher than the 2.1% rise in 1995 and the 1.1% fall in costs in 1994. Surveyed employers expect even larger cost increases this year, roughly in the 4% range.

But should this be a call for alarm after years of price stability? We don't think so.

No benefit manager can realistically expect health care costs to remain frozen forever. Providers face the same inflationary pressures-wage demands, building maintenance, fuel, technology upgrades-that boost costs for other employers.

In fact, benefit managers have had something of a free ride in terms of bearing the tab for health care cost inflation in recent years. Health maintenance organizations in many areas of the country have absorbed those expenses while competing vigorously to win market share.

But in the face of deteriorating financial results, many HMOs can no longer afford not to pass such costs on to their customers.

The rate increases many HMOs are putting in this year-generally 2% to 6%-are reasonable given how their own costs have risen since 1994, which is the year when many plans last raised rates.

As illustration, during 1994, the medical component of the U.S. Consumer Price Index increased 4.9%. It rose 3.9% during 1995 and was up 3.0% for 1996, according to the Bureau of Labor Statistics.

While we think the new round of rate increases is reasonable and can be justified, there are some disturbing signs on the horizon that costs could climb even higher.

One is that state legislatures seem increasingly bent on pushing so-called anti-managed care measures, which, if passed, could boost health plan costs.

In addition, hospitals in many areas of the country are merging, which will reduce the leverage HMOs and other health care purchasers have during rate negotiations.

At the same, the federal government seems almost certain to scale back expected increases in Medicare payments to providers. Those providers will no doubt try to boost fees for those covered under employer plans to compensate for the lower Medicare payments.

Before employers panic, however, they should realize there is still much they can do to restrain cost increases.

Many employers, for example, still offer too many HMOs to employees, reducing their own buying leverage with those plans. Other employers still haven't done enough-such as through plan design changes-to encourage their employees to use their managed care plans.

And yet other employers have not taken advantage of business health care coalitions in their areas, which as a group can more effectively negotiate with providers than any individual employer can.

Finally, many employers, despite having the resources to do so, have not examined provider practice patterns to determine the most effective providers in their communities, in terms of both price and quality.

In short, before sounding the alarm about a potential return to soaring cost increases, employers first have to be sure they are doing all they can to assure cost increases remain low. We think they will find they still wield considerable control over their costs.