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2007-09-24
Companies Focusing on Health Plan Designs and Keeping Employees Healthy to Help Mitigate Impact of Rate Increases

LINCOLNSHIRE, Ill. – U.S. companies enjoyed a nine-year low in health care cost rate increases this year, but employers and employees should not expect to see that trend continue in 2008, according to Hewitt Associates, a global human resources services company. In 2007, average health care rate increases were 5.3 percent, down from 7.9 percent in 2006. However, Hewitt is projecting an 8.7 percent average increase for employers in 2008.

Outlook for 2008

According to Hewitt, the average health cost per person for major companies will increase from $7,982 in 2007 to $8,676 in 2008. The amount employees are being asked to contribute in 2008 will be $1,859, representing approximately 21 percent of the overall health care premium and up from $1,690 in 2007. Average employee out-of-pocket costs, such as copayments, coinsurance and deductibles, are also expected to increase from $1,576 in 2007 to $1,738 in 2008. Overall, employees' total health care costs — including employee contribution and out-of-pocket costs — are projected to be $3,597 in 2008, up 10.1 percent from $3,266 in 2007.

"It's encouraging to see rate increases soften because it means that companies are making a concerted effort to manage health care costs," said Jim Winkler, practice leader of Hewitt's Health Management Consulting business. "However, one of the primary ways employers have been accomplishing this is by passing a significant percentage of costs to employees, and we're seeing evidence that this strategy is prompting an increasing number of employees to forego necessary preventative care and/or not comply with prescribed medications. While some cost shifting is appropriate, it's critical that companies design their health care programs in a way that encourages employees to use them — and use them wisely. Otherwise, they are essentially trading preventative care now for 'rescue care' later, which will lead to unhealthy employee populations, a decrease in employee productivity and ultimately — higher health care costs."

2007 Cost Increases by Major Metropolitan Area

While Hewitt's data shows a decline in overall cost increases in 2007, a few major U.S. markets experienced rate increases two-to-three times higher than the average: Nashville (14.1 percent), San Diego (11.5 percent) and San Francisco (11.5 percent).

"It's hard to pinpoint the exact reasons why health care cost increases vary in each region, but differences in health plan competition, demographics and market dynamics of health care providers are all factors," said Bob Tate, chief actuary of Hewitt's Health Management Consulting business. "We've noticed that several of the cities with the highest rate increases this year have a large number of employees enrolled in HMO plans, and these plans have experienced higher cost increases in recent years."

2007 Cost Increases by Plan Type

On average, Hewitt saw average cost increases in 2007 of 9.1 percent for traditional indemnity plans, 8.7 percent for health maintenance organizations (HMOs), 3.9 percent for point-of-service (POS) plans and 2.4 percent for preferred provider organizations (PPOs).

For 2008, Hewitt forecasts that companies will receive cost increases of 9.0 percent for traditional indemnity plans, 8.5 percent for POS plans, 9.0 percent for HMOs, and 8.5 percent for PPOs. That means from 2007 to 2008, the average cost per person for major companies will increase from $7,957 to $8,673 for HMOs; $7,790 to $8,452 for PPOs; $8,573 to $9,302 for POS plans; and $9,277 to $10,112 for indemnity plans.

"We believe the 2007 rates of increase for POS and PPO plans represent somewhat of a 'market correction' from prior-year, conservative pricing assumptions, especially for self-insured plans," said Tate. "Actual experience has been trending favorably relative to employer forecasts, resulting in less of a need for an increase for 2007."

Employer Response to Rate Increases

While rate increases remain moderate, employers continue to take proactive steps to mitigate costs and enable employees to make smarter and more effective health care decisions, including:

Adopting best practices and creating more stringent requirements around vendor selection. As employers adopt leading-edge strategies to impact the health of their workforce, they are increasingly contracting with an array of vendor partners, each focused on specific elements of the health care program. "Choosing best-in-class vendors can help make programs more cost-effective as long as the employer has built in an appropriate degree of cross-program accountability for the vendors," noted Winkler.

Pinpointing the drivers of costs. More companies are taking a closer look at the health risks and needs of their employee population and offering more focused programs and solutions targeted to employees who incur the majority of health care costs. According to recent Hewitt research, more than three-quarters (77 percent) of responding companies profiled the chronic health conditions prevalent in their workforce in 2007, compared with just 43 percent in 2006. In addition, between 65 percent and 79 percent of companies gave employees — or planned to give them in 2007 — access to targeted condition management or wellness programs through health plans or focused programs.

"By obtaining insight into the health risks and chronic conditions of at-risk populations in their workforce, employers can identify portions of the employee population that are currently — or likely to become — the most costly and make changes to their plan designs that will drive employees to make better, more consistent decisions about their health," said Winkler. "These types of programs not only influence healthy employee behaviors through integrated health management, but they provide companies with significant opportunities for short- and long-term cost savings."

Offering new health plans. Account-based plan designs are gaining traction by employers as a way to control costs. Hewitt's research found that more than 20 percent of companies offer, or plan to offer, a high-deductible health plan with a health savings account (HSA) by the end of this year and almost half are considering offering one at a future date. While just 3 percent of employees elected these plans last year, most companies anticipate that enrollment will grow to 20 percent in five years.

In addition, as fully insured HMO rates increase in excess of overall medical cost increases, an increasing number of companies are eliminating local HMO offerings and are now offering HMOs under a self-insured arrangement. This enables companies to offer more consistent plan designs and health care programs across their entire employee population, reducing administrative costs and simplifying communication messages to employees during annual enrollment.

Encouraging use of health care via "value-based" plan design changes. While still an emerging concept, more companies are beginning to incorporate value-based design changes into their health care programs. These types of plans remove the unnecessary barriers to care that employees face by providing them with incentives to use appropriate care/services to manage their health.

According to recent Hewitt research, almost one in five (19 percent) large companies has implemented a value-based plan design, and another 40 percent are interested in learning more about them. Hewitt recently introduced a Value-Based Design Model that enables companies, in real time, to analyze the compliance effects and financial impact of reducing employee cost sharing for specific health care services and increasing employee cost sharing for others. Using companies' existing prescription drug utilization and cost data, the tool also helps them understand how to make these clinically desirable plan design changes without increasing overall health care costs.

Changing prescription drug coverage. Companies are focusing more on generic and value drug programs, aggressive Pharmacy Benefit Manager (PBM) contracting and coinsurance in their drug plans to continue to influence utilization and costs. They are also taking more interest in measuring employee compliance with prescription drug usage so that they can make changes to their plans – including adding incentives – in order to encourage employees to take medications for which they were prescribed.

About Hewitt's Data

Hewitt's health care cost data is derived from the Hewitt Health Value Initiative, a cost and performance analysis database of more than 1,800 health plans throughout the U.S., including 400 major employers and more than 18 million health plan participants.

About Hewitt Associates

With more than 65 years of experience, Hewitt Associates (NYSE: HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,300 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 340 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 24,000 associates. For more information, please visit www.hewitt.com.