WorldatWork Staff
November 20, 2007

Total U.S. health benefit cost rose by 6.1% in 2007, the same pace as last year, to an average of $7,983 per employee, according to a survey.

The good news is that cost increases have held steady for three years (after spiking to nearly 15% in 2002) and are likely to slow a bit further in 2008, reports Mercer’s National Survey of Employer-Sponsored Health Plans. The bad news is that’s still more than twice the rate of inflation. Health cost growth is outpacing wages and material costs and eroding business profitability.

There are consequences for working Americans as well: In the absence of a mandate to provide coverage, some small employers are simply dropping their plans, adding their employees to the growing rolls of the uninsured. Among employers with fewer than 200 employees, health coverage prevalence fell from 63% to 61% in 2007—and that’s down from 66% five years ago. This drop-off is continuing despite the new availability of relatively low-cost consumer-directed health plans (CDHPs), which may be a concern for state and federal policymakers debating the future of U.S. health insurance.

Mercer’s survey included private and public employers with 10 or more employees. Nearly 3,000 employers participated in 2007.

The Mercer survey also found that employers expect cost to rise 5.7% in 2008. That figure takes into account any changes that employers will make in the level of benefits, the type of plan offered, or the plan vendor. If employers made no changes, the cost of their largest medical plan would rise by about 8%, they predict.

After the out-of-control cost growth in the early part of this decade, a fourth year of single-digit increases begs the question, why isn’t it worse? Cost shifting is one reason. Among large employers (those with 500 or more employees), average in-network PPO deductibles rose by about 11%, from $426 to $473 for individuals and from $1,022 to $1,134 for families

Small-employer deductibles, already much higher, rose by only about 2% for individuals (from $859 to $872 among employers with 10-499 employees) but by 5% for families (from $1,786 to $1,879).

“Given that the majority of covered employees are in PPOs, an increase in deductibles of this size could dampen employers’ total health cost increase by about a point,” said Blaine Bos, Mercer worldwide partner and spokesman for the survey.

But even if employers made no benefit cuts at all, the rate of increase still appears to be slowing. Employers estimated that the cost of their largest medical plan would increase 8 percent in 2008 “before changes.” That’s down from 9% in 2007 and 10% in 2006.

“The slowdown in the underlying trend reflects slowing utilization,” Bos said. “And that is very likely tied to the proliferation of health management activities and other consumerism strategies.”

The survey found that 80% of large employers use health management programs as a way to control cost and improve productivity, while 52% are actively promoting employee consumerism. The majority of employers using these strategies say they have been successful (63% for health management and 62% for consumerism). Large employers, which tend to be more proactive in cost management, experienced a somewhat lower average cost increase than small employers in 2007 (5.1% compared to 6.6%)

Enrollment in Consumer-Directed Health Plans Rises Sharply

Another factor that may have served to slow cost increases was the growth in enrollment in consumer-directed health plans, the type of medical plan with the lowest cost by far. In 2007, the percentage of employees enrolled in a CDHP (based on either a Heath Savings Account or a Health Reimbursement Account) rose from 3% to 5% of all covered employees.

“As employees shift from more expensive plans into less expensive ones, employers’ overall cost per employee drops,” Bos said. “This is what we saw happen in a big way when employees moved out of traditional indemnity plans into managed care plans in the mid-1990s.”

CDHPs are most common among the largest employers, where they are typically offered as an option alongside other medical plan choices. Mercer found that just 7% of employers with fewer than 500 employees now offer CDHP, up from 5% in 2006. However, they are offered by 14% of all larger employers (up from 11%) and 41% of those with 20,000 or more employees (up from 37%). The lion’s share of the plans added in 2007 were based on HSAs, which don’t require an employer contribution.

“Employer adoption of CDHPs slowed in 2007 and will be moderate in 2008 as well,” Bos said. “The next big wave of adopters is still waiting to be convinced that the plans work before they commit.”

Evidence that the plans are cost-effective is accumulating. CDHPs delivered substantially lower cost per employee than either PPOs or HMOs in 2007. CDHP cost averaged $5,970 per employee, compared to $7,120 for HMOs and $7,352 for PPOs. Of the two types of CDHPs, HSA-based plans were less expensive than HRA-based plans ($5,679 compared to $6,224). Employer account contributions are a standard feature of HRAs but not of HSAs: more than a third of large HSA sponsors do not contribute. Among those that make an HSA contribution, the average contribution is about the same as the average HRA contribution: $626 and $621, respectively.

The obvious explanation for the difference in cost between CDHPs and the other medical plan types is the higher deductible. In HSA-based plans, a minimum individual deductible of $1,100 is required. But if CDHP cost is compared to just PPOs with deductibles of $1,000 or higher (which averaged $6,644 per employee), the gap in cost is still close to $700, which lends support to the theory that the account feature encourages more careful health spending.

The other measure of CDHP performance is employee acceptance. When Mercer asked about the reaction of employees enrolled in the plan, about three-fifths of the large sponsors with an HSA-based CDHP (61%) said it was either “strongly positive” or “more positive than negative.” In addition, fewer than 10% believed that employees enrolled in these plans did not seek or receive appropriate levels of preventive care, care for chronic conditions, or care for sudden, acute conditions.

Finally, while data on change in enrollment over time is still sparse, among the 77 large employer sponsors that have had a CDHP in place for at least three years and give employees another choice of plan, the Mercer survey found that average enrollment rose from 21% in 2005 to 29% in 2007.

“With these encouraging results, it might seem surprising that employers aren’t moving faster to adopt CDHPs,” Bos said. “But they worry that a big change in such an important benefit could hurt attraction and retention. So even when they do add a CDHP, most make it an option, which dilutes potential savings.”

The Trillion-Dollar Question: Increasing Access for the Uninsured

The early advocates of CDHPs promised these plans would provide an option for small employer health plan sponsors contemplating terminating their plans because of cost. However, as noted earlier, health plan offerings by small employers continued to erode despite the widespread availability of CDHPs in 2007. In addition, more than a fifth of small employers that provide coverage do not subsidize family coverage at all (22%); the employee must pay the full cost of coverage for all family members.

“While the average cost of an HSA-based CDHP is about 20% lower than the average medical plan, that doesn’t make it affordable to all employers. Solving the problem of the uninsured will mean addressing the question of affordability,” Bos said. The great majority of large employers remain committed to offering employee coverage to their full-time employees and their families. Where large employers bump up against the question of access is with their part-time employee populations. In some industries—wholesale/retail and services—more than a third of the workforce is made up of part-timers (42% and 34%, respectively). Yet only 62% of large employers with part-time employees extend coverage to part-timers. Employers in the wholesale/retail industry are the least likely to do so (38%).

So-called “mini-med” plans, which strictly limit the total amount of benefits payable in a year ($10,000 is a common limit) are now offered by 7% of all large employers and 19% of large wholesale/retail employers as a way to provide some kind of low-cost coverage to part-timers not eligible for the regular plan or to full-time employees not yet eligible for coverage.

“The arguments for and against mini-med plans tend to fall into the ‘is the glass half-empty or half-full?’ variety,” Bos said. “Some employers think they’re better than nothing. Others think they’re dangerously inadequate because they don’t cover catastrophic expenses.”

So how do employers view the state and federal reform efforts that are aimed at increasing access for the uninsured? To a significant extent, it depends on how big they are. The Mercer survey asked whether employers favored or opposed “pay or play” laws (requiring employers to offer a health plan or pay into a fund to provide coverage to the uninsured) and mandating that individuals buy insurance at specified levels of coverage and cost. Fewer than a fourth of all employers support pay or play (23%), and the larger they are the less likely they are to approve: among those with 20,000 or more employees, only 13% approve, while 49% disapprove.

“Most large, multistate employers want to retain flexibility and control over their plans and avoid the burdens and complications of complying with numerous state mandates,” Bos said. “Small employers are typically most concerned about the affordability of coverage and even those currently offering a plan may want the option of state insurance pools for their employees.”

Individual mandates—requiring all individuals to purchase coverage—also received only lukewarm support, Mercer found: 23% approve or strongly approve of this approach, while nearly half (48%) disapprove. “You might expect more employer health plan sponsors to favor individual mandates, which could relieve existing employer plans of cost shifting from the uninsured,” Bos said. “It may be that employers—or at least the individuals responding to the survey—are simply mistrustful of any kind of government-imposed mandate.”

Other Findings

Retiree medical coverage: After years of slow decline, there was a slight uptick in retiree medical offerings in 2007—driven by employers with 500-999 employees. Among all large employers, 31% offer coverage to pre-Medicare-eligible retirees and 21% offer it to Medicare-eligible retirees, up from 29% and 19% in 2006, respectively. However, among employers with 1,000 or more employees, offerings of coverage for pre-Medicare-eligible retirees fell from 34% to 31%, while coverage for Medicare-eligible employees fell from 25% to 22%. Same-sex domestic partner coverage is on the rise, with 34% of large employers making it available in 2007, up from 29% last year. The larger the employer, the more likely they are to include domestic partners as eligible dependents: 68% of those with 20,000 or more employees cover same-sex domestic partners up from 62% in 2006 and 55% in 2005. Spousal coverage: The use of special provisions to limit election of coverage for spouses who have other coverage available is growing slowly. One in ten large employers have a special provision, up from 8% in 2006, with 5% expecting to add a provision in 2008. Smoker status: Some large employers are attempting to reduce tobacco use in their workforce by tying employees’ premium contributions to their smoker status. While just 5% of all large employers use this incentive, 16%of the largest do so (those with 20,000 or more employees). These employers are also more likely to learn about their employees’ health habits through Health Risk Assessments: 78% offer an HRA, compared to 56% of all large employers.

[www.mercer.com/ushealthplansurvey]