Costs Keep Escalating. (Healthcare).

While the economy keeps shifting clown, health care costs keep revving up. Several recently released surveys confirm the continuing trend, even if the numbers differ slightly. That's discouraging news for many companies that have aggressively tried to rein in costs, but are finding little success.

The numbers in the table on this page come from a survey of 200 companies with 1.4 million employees conducted by Watson Wyatt, the human resources consulting firm. In addition, the firm found that cost increases for post-65 retirees are expected to accelerate, from 13.3 percent this year to 15.1 percent in 2002.

Watson Wyatt's survey found that 56 percent of employers said they would raise employee contributions by as much as or more than their expected cost hikes. What's more, over 70 percent said they were considering benefit reductions or an increase in employee co-payments over the next year.

The Segal Co., a benefits consulting firm in New York, noted that health management organization (HMO) increases surpassed those at preferred provider organizations (PPOs) for the first time since it began measuring annual changes. "In general, HMO and POS (point-of-service) plans have relaxed their managed care rules and needed to raise the provider fees, resulting in higher than expected increases, Segal said.

Segal, which surveys health plan costs annually, noted that PPO and traditional fee-for-service (FFS) plan costs rose between July 2000 and July 2001 at a rate around 1 percentage point over the previous year, and managed dental plan increases were up 1 to 2 percentage points. Prescription drug costs, however, rose at a rate 1.5 points below last year's results. "The likely reason behind this decline is that many clients have aggressively renegotiated [prescription] contracts, which helps to offset increases in both drug costs and utilization," Segal noted.

Insurance giant Marsh Inc.'s healthcare survey found that in 2000, for the third consecutive year, benefit cost increases for small and mid-sized employers were more than twice the inflation rate, nearing double digits. Expenses were driven up by escalating prescription drug costs and steeper prices charged by managed care organizations. Health care costs for employers with 10-999 employees rose 9.2 percent in 2000, following increases of 8.5 percent in 1999 and 5.1 percent in 1998, Marsh found.

The biggest jump came in prescription drug costs, which Marsh says jumped an average of 14.7 percent - very similar to the rate in the Segal survey. "While the groundswell of new drugs brought to market in the past two years represents a substantial benefit for consumers, the absence of generic alternatives to many popular drugs is pushing up costs," said Roger C. Edgren, head of Marsh's employee benefits operation, which serves mid-sized companies.

To address rising costs, Edgren said, more employers are building cost-sharing into their prescription drug plans. "We'll see more businesses move from simple co-payment plans, where employees pay a flat fee for drugs, to coinsurance, where employees pay a fixed percentage of the costs," he said.

There's little good news on the horizon, either. Because 90 percent of employees are already enrolled in managed care plans, employers no longer have a significant opportunity to save by moving them out of expensive indemnity plans, Marsh observes. As a result, two-thirds of small and mid-sized employers expect health benefit costs to rise another 12 percent this year, on average, according to the report.

In fact, Edgren notes, many small and mid-sized companies are actually seeing costs jump 20 to 40 percent or even more this year, depending on their insurance carrier and their location; the hikes have been highest in the Northeast and lowest in the South. The rise in costs, together with a slowing national economy, gives employers little choice but to shift more costs to employees. Some 49 percent of small and mid-sized employers planned to hike employee contributions or cost-sharing requirements in the 2001 plan year, Marsh's survey found.

Average Expected Premium Cost Hikes 2001 to 2002 (active employees)


All plans                   13.6%
Indemnity                   14.4%
Preferred Provider
Organization (PPO)          13.7%
Point of Service (POS)      12.7%
Health Maintenance
Organization (HMO)          13.9%
Prescription drug benefits  17.0%
Medical only                13.0%
Dental                       6.7%

Source: Watson Wyatt