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Health cost increases hold steady--for now

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By stressing consumerism and heath care management, U.S. employers have successfully managed to keep the rate of increase in group health plan costs steady in the past two years.

In 2006, group health care plan costs increased 6.1% to an average of $7,523 per employee, up from $7,089 in 2005, according to a survey of nearly 3,000 employers by Mercer Health & Benefits L.L.C. in New York.

That 6.1% increase for 2006--identical to the rise in 2005--follows years of much steeper cost hikes. Health care costs jumped an average of 14.7% in 2002, 10.1% in 2003 and 7.5% in 2004.

However, if past performance is any indicator of future trends, it is unlikely the lull will be sustained for yet another year, warns Blaine Bos, a Mercer worldwide partner in Minneapolis.

"This suggests a tapering off of the rate of increase--6.1% for 2005 and 2006. It's actually three years because what (employers are) suggesting is that after they make changes in 2007, it will be 6.1% again. So we're looking at a flat-lining, if you will, of cost increases," he said.

But the likelihood that health care inflation will remain flat or decline "is not great," Mr. Bos said. "If you go back historically, there's a good chance that we're going to see prices going back up again in 2008. That's a little sobering."

In a departure from prior years' practice, employers last year were able to mitigate the growth in their group health benefit costs by focusing on consumerism and care management rather than merely cost-shifting to employees, Mr. Bos said.

"If you go to back two or three years, cost-shifting was the primary strategy for addressing the rate of increase in health care costs," he recalled. Now, "the strategy is more around consumerism and health management, which are strategies that aren't necessarily burdening employees with more and more of the total cost."

For example, 43% of all employers and 71% of large employers said they plan to use care management as a cost management strategy during the next five years. Similarly, 43% of all employers and 64% of large employers said they plan to use consumerism as a cost management strategy during the next five years, the study found.

In addition, health risk assessments are now offered by 22% of large employers, those with 500 or more employees, and 53% of what Mercer called "jumbo" employers, organizations with 20,000 or more employees.

Employers also are offering incentives to encourage employees to participate in these new care management programs, Mercer reported. The incentives range from noncash rewards such as T-shirts and water bottles, which are used by 8% of large employers and 7% of jumbo employers; to cash, which is the most popular incentive and is used by 9% of all employers and 16% of jumbo employers.

This shift to less expensive consumer-driven health plans helped to slow the overall rate of increase in group health care costs, Mercer found.

The average annual CDHP cost of $5,770 per employee is 5.3% higher than last year's average of $5,480, but the rate of increase was greater for both preferred provider organizations and health maintenance organizations, which grew by 7% to $6,932 per employee and 6.5% to $6,616, respectively.

The highest rate of increase was among PPOs with deductibles of $1,000 or more that were not linked to either health reimbursement arrangements or health savings accounts. The cost of these plans surged 12%, to $6,019 per employee in 2006 from $5,355 in 2005, according to Mr. Bos, who noted such plans' cost may vary greatly from year to year because of their small survey sample size.

The percentage of all employers offering a CDHP tripled in 2006 to 6% from 2%, as small employers began adopting this new plan type, Mercer found. But growth was also strong among large employers, where CDHP offerings rose to 11% from 5% among employers with 500 or more employees, and to 37% from 22% among jumbo employers. As more employers began offering CDHPs, the plans also captured the interest of an increasing number of employees. Nationally, enrollment in CDHPs jumped in 2006 to 3% from 1% of all covered employees.

Though CDHPs with HRAs had been more prevalent than those with HSAs, HSA-linked plans grew at a faster clip than HRA plans in 2006. HRAs have been available since 2002, while HSAs were authorized as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003--too late for most employers to offer them in 2004, Mercer points out.

In 2006, 4% of all employers offered an HSA, while just 2% offered an HRA. Small employers were more likely to offer HSAs, while large employers were about equally divided between HSAs and HRAs.

HSAs are attractive to small employers because "it's a very simple plan design and they don't want to have a lot of muss and fuss because they don't have the time for it and they don't have the resources," Mr. Bos said.

They also cost less.

Looking at employers with 500 or more employees, HSA plans cost 19% less than HRA plans, averaging $5,005 per employee vs. $6,214 per employee for HRA-linked plans.

While nine of 10 employers sponsoring CDHPs offer them as a choice alongside other plan options, six of 10 small employers are more likely to offer them as full replacement for existing plans, the Mercer survey found.

Consequently, the people who elect to enroll in HSAs are most likely to be employees of small employers or large employers' workers who understand the tax advantages of HSAs, Mr. Bos said.

Copies of the "Mercer National Survey of Employer Sponsored Health Plans 2006," will be available in late March 2007 from Tara Lewis, Mercer Health & Benefits, 1166 Ave. of the Americas, 29th Floor, New York, N.Y. 10036; 212-345-2451. Copies will also be available online at http://mercerhr.com/ushealthplansurvey. The cost of the report is $500, and the report and tables cost $1,000.