Double-Digit Health Care Cost Increases Expected to Continue in 2002; According to Hewitt Associates, U.S. Companies and Consumers to Pay More for Health Care.

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LINCOLNSHIRE, Ill.--(BUSINESS WIRE)--Oct. 29, 2001

U.S. employers are expected to be hit again with double-digit health care cost increases in 2002, marking the fourth year in a row of major health care hikes and the highest increase since the early 1990s, according to global management consulting and outsourcing firm Hewitt Associates.

Hewitt is projecting average increases of 13 to 16 percent for 2002, depending on the type of health plan, and this comes after last year's average rate hike of 10.2 percent.

Some companies will absorb the majority of next year's rate hikes, but many will pass along at least 25 to 30 percent of the increase to employees, according to Hewitt. With the average health plan projected to cost $5,524 per employee next year, up from $4,778 in 2001, that means employees will pay between $186 and $463 more for their health coverage in 2002.

"With a slowing economy, skyrocketing health care costs and shrinking bottom lines, containing health care costs is becoming a top priority for organizations," said Jack Bruner, national health care practice leader, Hewitt Associates. "Health care costs will continue to increase at a double-digit pace for the next few years unless there is a fundamental change in the way health care is delivered."

Cost Increases by Plan Type

On average, Hewitt forecasts that companies will receive 2002 cost increases of at least 13 percent for preferred provider organizations (PPOs) and point-of-service (POS) plans, 15 percent for traditional indemnity plans and 18 percent for health maintenance organizations (HMOs).

That means from this year to next, the average cost per person for most major companies will increase from $4,522 to $5,336 for HMOs; $4,834 to $5,463 for PPOs; $4,857 to $5,489 for POS plans; and $5,928 to $6,817 for indemnity plans, according to the Hewitt Health Value Initiative(TM), a database of more than 2,000 health plans in 139 U.S. markets, including 300 major employers and more than 16 million health plan participants.

"Employers simply cannot afford to continue to absorb double-digit health care cost increases and are having to evaluate new alternatives to contain costs," added Bruner. "The bad news is that employees will again have to pay more out of their paycheck for health care, and some smaller to midsize companies may not be able to afford to provide health care coverage if rate increases continue at this pace."

Cost Increases Across Major Metropolitan Areas

Rate hikes of at least 13 to 16 percent will affect nearly every major U.S. metropolitan area next year, after most also experienced significant increases in 2001.

Hewitt's data reveals that the following cities recorded the highest rate increases: 15.8 percent in Cincinnati, 13.9 percent in Houston, 13.7 percent in Phoenix, 12.8 percent in Boston, 12.5 percent in Dallas/Fort Worth, 12.4 percent in Tampa Bay, 12.1 percent in Detroit, 12 percent in Atlanta and 11.6 percent in Denver.

"Unfortunately, no one is safe from health care cost hikes," Bruner said. "Locations with significant HMO penetration seem to be the hardest hit because of the continued financial pressures on the managed care industry."

Employer Reaction to Rate Increases

How are organizations reacting to the rate hikes? In addition to passing along part of the increase to their employees, Hewitt finds that companies also are doing the following:

Re-thinking cost sharing and contribution strategies. The primary and most reliable means to control short term cost increases is re-evaluating employee contributions and out of pocket cost sharing strategies. "Employers are focusing on ways to structure cost increases in an effort to prompt employees to migrate to more cost efficient plans, use spousal coverage, reduce discretionary use, or to select lower cost therapies," said Bruner.

Making design changes for prescription drug plans. "Because skyrocketing drug costs and increased drug utilization are major drivers behind the insurance hikes, many organizations are changing their prescription drug coverage. While a majority of employers have already adopted a three-tier system, many organizations are moving toward higher copayments and coinsurance structures," said Bruner. "Companies are also beginning to explore carving drug coverage out of HMOs, offering customized drug options and other new concepts that recognize the unique challenges of managing prescription drug costs."

Tightening up managed care plans. "Employers also are making design changes to their managed care plans by increasing copayments for office visits and prescription drugs, and providing heftier out-of-network penalties," Bruner added.

Eliminating "cost inefficient" plans. "Companies are taking a closer look at the health plans they currently offer by reviewing quality and financial factors, and eliminating those that aren't cost efficient," Bruner said. "We've continued to find significant variations in the cost and rate of increases in local health plans and companies are beginning to balance efforts to reduce costs in each location with a need to consolidate to fewer plans where they can get a significant advantage and simplify administration."

Moving toward PPO plans. Bruner also added, "We are seeing a transition from POS plans to PPOs as the preferred open ended managed care model. PPOs offer lower administrative fees, competitive discounts, greater freedom for employees and can be relatively cost neutral to organizations. While HMOs continue to have lower costs in many areas and are still a core component of companies' strategies, employers are becoming more sophisticated about managing choices between HMOs and PPOs. Some are worried that their younger and healthier employees are currently enrolled in HMOs and are particularly concerned about paying high insurance rates for their workforce. More companies are interested in exploring self-insured HMOs, risk adjustment or directive contribution strategies to manage this challenge."

Contracting with plans that offer specialized programs. "Companies with employee populations that have a high prevalence of specific health conditions, such as asthma, diabetes or heart problems, are starting to contract with health plans that offer programs specializing in those areas," said Bruner. "It's critical for a company to design programs that help employees manage their conditions and then create incentives encouraging employees to participate. In doing this, employees receive more specialized care and employers could potentially see a reduction in health care costs."

Developing plans that empower employees. "And, finally, employers are evaluating the emerging types of plans currently being developed to put consumers in more control of their health care decisions. Plans that combine high deductible medical plans with employer paid medical accounts to ones that provide employees with the ability to design their own plan and network of providers offer new and exciting opportunities for employers to control costs and at the same time deliver a high value benefit," Bruner concluded.

Hewitt Associates LLC is a global management consulting and outsourcing firm specializing in human resource solutions. With 2000 revenues of nearly $1.3 billion, Hewitt has the largest benefit consulting business in the U.S. and ranks among the Top 200 of the largest private companies.

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