U.S. companies continue to face significant health care cost increases, but 2005�s is the lowest rate increase in six years, according to global human resources services firm Hewitt Associates (NYSE: HEW). For 2006, Hewitt is projecting a 9.9 percent average increase for employers, following 2005�s 9.2 percent increase.
Employees� contributions for health care have steadily increased, nearly doubling since 2002. Hewitt projects that the average employee contribution1 for 2006 will be $1,612, representing 20 percent of the overall health care premium, and up from $1,444 in 2005.
In addition to significant employee contribution increases, employees also have experienced increased out-of-pocket costs, such as copayments, coinsurance and deductibles. The average employee out-of-pocket costs are expected to increase from $1,366 in 2005 to $1,524 in 2006. Overall, employees� total health care costs -- including employee contribution and out-of-pocket costs -- are projected to be $3,136 in 2006, up 12 percent from $2,810 in 2005.
With relatively flat pay increases -- Hewitt projects salaried exempt employees can expect a base salary increase of 3.6 percent2 in 2006 -- rising health care costs are offsetting salary gains for many workers. For example, an employee making $40,000 today who receives the average salary increase ($1,440) will use 23 percent of that increase to pay for the increase in health care costs next year.
�While it is encouraging to see cost increases stabilizing, the rate of growth remains unsustainable and the magnitude of health care costs continue to be a major concern for employers� bottom lines and employees� wallets,� said Craig Dolezal, national health care practice leader at Hewitt Associates. �These slightly lower cost increases are due to a variety of factors, including increased consumer awareness and financial responsibility, continued consolidation of health plans and providers, and lower overall inflationary demands. However, health care is still growing almost three times faster than wages and general inflation.�
Cost Increases by Major Metropolitan Area
While Hewitt�s data shows a moderation in costs, a few major U.S. markets continued to experience double-digit increases. Hewitt�s 2005 data reveals that the following markets recorded the highest rate increases: Cleveland/Akron (12.2 percent), Boston (11.1 percent), Atlanta (11.1 percent), Houston (10.6 percent), Orlando (10.4 percent), Kansas City (10.4 percent), Orange County (10.4 percent), Sacramento (10.4 percent) and Tampa Bay Area (10.3 percent).
�Health care remains a very local issue driven by demographics, regional health issues, and the market dynamics of the providers and health plans competing for patients and members. The current efforts for more consistent treatment protocols, better health risk management, and price and quality transparency will narrow, not eliminate, these regional differences over time,� said Dolezal.
2006 Cost Increases by Plan Type
On average, Hewitt forecasts that companies will experience 2006 cost increases of 9.5 percent for preferred provider organizations (PPOs), 10 percent for health maintenance organization plans (HMOs), and 10.5 percent for both traditional indemnity and point-of-service (POS) plans.
That means, from 2005 to 2006, the average cost per person for major companies will increase from $7,048 to $7,752 for HMOs; $7,374 to $8,075 for PPOs; $7,322 to $8,091 for indemnity plans; and $7,849 to $8,673 for POS plans.
Employer Reaction to Rate Increases
Companies continue to evaluate and implement substantial changes -- both traditional and leading-edge strategies -- to manage increasing health care costs. Hewitt Associates is currently working with many large employers to develop new strategies to reduce costs and assist employees with managing their heath care decisions and financial responsibilities, including:
* Offering consumer-directed health plans. Hewitt has found that companies with significant enrollment in consumer-directed health plans, such as account based plans and customized �build-your-own� designs that allow employees to tailor a plan based on their individual health and financial needs, are experiencing rate increases well below the national trend or, in some cases, even decreased costs. �To date, Hewitt has helped more than 100 organizations introduce consumer-directed plans and we�re starting to see positive results,� said Dolezal. �We�re continuing to see a lot of interest in these plans and expect even more companies will offer them in the next few years, maybe as many as 25 to 30 percent of all large employers.�
* Contracting with plans that offer specialized or health risk management programs and focus on wellness and prevention. In an effort to enhance or maintain the health of their workforce, more employers are offering specialized or health risk management programs that can help manage employees� chronic health conditions. More companies are offering wellness and health promotion programs, as well as providing financial incentives for employees to participate in these programs. �In the end, we need to continue to help people better manage their health risks and the care they receive if we have any real hope of reducing health care cost increases,� said Dolezal.
* Requiring more quality data and price transparency. Employers have increased their focus on quality. Many are choosing to work only with plans and hospitals that have solid track records in terms of efficiency, quality, outcomes and cost. Quality information is becoming more detailed and widely available, and employers have begun to require greater cost transparency, especially in the area of prescription drugs.
* Changing prescription drug coverage. Prescription drug costs continue to be a major driver behind insurance hikes, and employers are actively evaluating new strategies to contain these costs. For next year, companies are implementing higher copayments and coinsurance models, mandating low-cost substitution provisions and mail-order for certain therapeutic drug classes, and offering generous generic programs and designs.
�The American public will continue to demand the highest level of health care in the world, and the health care industry will continue to strive to deliver that level of service. Our challenge and obligation then is to satisfy those demands in the most efficient manner possible by identifying and promoting consistent quality care at affordable costs for both employers and patients,� said Dolezal.
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 2,000 health plans throughout the U.S., including 400 major employers and more than 18 million health plan participants.