- Increase of 6.7% predicted for 2006
- Employers shift cost to plan members who use the most services, but also provide them with more support
- Fewer small employers offer coverage in 2005, despite availability of low-cost consumer-directed health plans (CDHPs)
- CDHPs concentrated among jumbo employers (20,000 or more employees)
- Rise of consumerism raises questions about future of HMOs
When annual health benefit cost increases peaked three years ago at nearly 15%, employers responded with an unprecedented flurry of plan redesign. Increases have slowed each year since then, with cost rising just 6.1% in 2005 to an average of $7,089* per employee, with a similar increase - 6.7% - predicted for next year.
According to the National Survey of Employer-Sponsored Health Plans, conducted annually by Mercer Health & Benefits LLC, employers predicted in 2004 that their health benefit cost would rise by an average of 10% in 2005 if they made no changes. However, they expected to lower that increase to about 7% through a variety of initiatives, including cost-shifting and changing vendors. Mercer´s 2005 survey, released today, shows they succeeded.
The survey is conducted using a national probability sample and, with nearly 3,000 employer participants in 2005, is the largest scientific annual survey on the topic. All employers, public and private, with at least 10 employees were sampled. The survey was conducted during the late summer, when most employers have a good fix on their costs for the current year. Results represent about 600,000 employers and more than 90 million full-time and part-time employees, and have an error range of +/-3%.
Cost-shifting continued
A key tactic employers used to lower their 2005 cost increase was again cost-shifting. While the average employee contribution as a percent of premium was essentially unchanged, employers increased employee cost-sharing at the point of service. An individual deductible for in-network care is now required in 80% of PPO plans, up from 73% last year. Among large employers (500 or more employees) the median deductible amount rose from $250 to $300. The median small-employer deductible did not change, but the percentage of small employers requiring a deductible of $1,000 or more reached 34%, up from 31% in 2004. Fewer large employers require a deductible of this size (9%), but their number is growing as well.
The use of coinsurance as a means of sharing the cost of office visits increased, from 5% to 9% of all PPO sponsors and from 18% to 22% of all large sponsors. Among jumbo employers (20,000 or more employees), the use of coinsurance jumped from 26% to 37%. This is a significant departure from the recent past, in which PPOs moved to copays to compete more effectively with HMOs for enrollment. Coinsurance reflects the actual cost of the service provided and thus is seen as a consumerist strategy. It also tends to shift more cost to employees than copays do.
Blaine Bos, a consultant with Mercer Health & Benefits and one of the study´s authors, notes that large employers shifted cost to employees by raising their out-of-pocket costs for care rather than by raising their premium contributions. "This signals their preference for keeping the cost of the plan down for all employees by shifting cost to those who use it most," Mr. Bos says.
In HMO plans, the biggest change was an increase in plans requiring a hospital deductible (from 55% to 64%) and an increase in the average office visit copayment from $16 to $18. Over a fourth of HMO sponsors (28%) impose a higher copayment for specialist visits, on average $29 (Fig. 4).
Employers see consumerism and care management, not further cost-shifting, as the future of cost management
Employers were asked how significant each of six different cost-management strategies would be to their organizations over the next five years. "Scaling back benefits or cost-shifting" received the lowest scores, with just 21% of all employers saying this strategy would play a significant or very significant role over the next five years. The two strategies that the most employers say they will focus on are consumerism, defined as "promoting informed and responsible spending by employees for health care," and care management, a range of programs designed to improve employee health, including disease management (Fig. 5).
Over a third of all employers (34%) said consumerism will be significant or very significant to their cost-management efforts over the next five years, while 32% said care management will be significant or very significant. Interest in both strategies is higher among large employers, who gave the highest rating to care management (62%), followed by consumerism (55%).
"Many employers see these strategies as two sides of the same coin. Care management programs require the active involvement of employees in improving their health, while consumerist strategies engage the employees in managing health care cost," says Mr. Bos.
More employers confirming ROI from care management programs
Care management programs grew strongly in 2005, lending support to employers´ assertion that this will be a key strategy for the next five years. Use of all types of disease management programs grew, and the percentage of employers offering at least one program jumped from 32% to 41%. Two-thirds of large employers now offer one or more disease management programs: 67%, up from 58% (Fig. 6).
"As employers are shifting cost to employees who use more health care, they´re also implementing programs to help them get better care and learn how to better manage their own health," says Mr. Bos.
Health risk assessments, sometimes used to identify employees who could benefit from a disease management or other care management program, are offered by 46% of large employers, up from 35%. The use of behavior modification programs (such as smoking cessation or weight management programs) rose sharply as well, from 21% to 30% of large employers.
Importantly, employers are beginning to offer incentives to encourage employees to participate in care management programs, with large employers taking the lead. In 2005, 17% of large employers that offer health risk assessments provided an incentive, as did 7% of those offering one or more disease management programs. These incentives are often cash, but some employers tie them to the medical plan, offering lower copayments or premium contributions. Others provide token rewards or gifts. The value of the incentives offered varies widely, with about a third of these employers (35%) providing incentives worth $25 or less and about a fourth (27%) providing incentives worth more than $100.
"While still in a growth mode, care management is now a mature strategy. Employers are no longer just paying lip service to this concept," says Mr. Bos. "Could these programs be one reason behind the slowing cost increase? You bet."
For some employers, a deterrent to adding or maintaining care management programs has been the difficulty of proving their effect on lowering health benefit cost. Improved health may not result in an immediate savings but rather curb spending further down the road. As programs gain longer track records, more employers are attempting to measure the return on their investment. Over a fifth of all large employers offering care management programs say they have attempted to measure ROI (21%, up from 14% in 2004). Among employers with 20,000 or more employees, this rises to 45%.
Jumbo employers added CDHPs in 2005 while smaller employers stayed away
Employers implemented a range of consumerist strategies in 2005. Two-fifths of all employers now provide employees access to a website with information on provider quality and cost, and 17% provide a tool to help them select the plan that will best meet their needs based on expected health care utilization.
Many of the nation´s largest employers took the step of implementing a consumer-directed health plan (CDHP). Among jumbo employers (20,000 or more employees), CDHP offerings rose sharply, from 12% to 22%. Otherwise, CDHPs saw only modest growth. Only 2% of all employers with 10 or more employees offered CDHPs in 2005, and only 5% of large employers - those with at least 500 employees - offered them (Fig. 7).
Enrollment in CDHPs also remained low. Nationally, just 1% of all covered employees are enrolled in CDHPs. When a CDHP was offered alongside other medical plans in 2005, on average 14% of employees chose to enroll. Among the jumbo employers offering CDHPs, enrollment averaged 8%.
Small employers´ lack of interest in CDHPs was a surprise. When Health Savings Accounts (HSAs) were created by the Medicare Modernization Act of 2003, proponents said HSAs would expand access to coverage by providing a less-expensive option for small employers who might not otherwise offer coverage. This theory hasn´t panned out: use of CDHPs by this group reached only 2% in 2005, while the percentage offering any form of health plan dropped from 66% to 63% (Fig. 8).
"It seems the cost difference - about 13% lower than the average cost of HMO coverage, and 18% lower than the average PPO cost - just wasn´t enough to prevent some small employers from dropping coverage," says Mr. Bos. "The more complex plan design may also be a deterrent given that most small employers don´t have a robust HR staff."
He adds that many small employers instead lowered plan cost by raising deductibles (34% of small PPO sponsors require an individual deductible of $1,000 or more). "In 2005, a PPO with a $1,000-plus deductible was less costly than the average CDHP," Mr. Bos says.
Except for the jumbo employers, it´s difficult at this time to predict what percentage of employers will offer CDHPs in 2006. Survey respondents complete the survey in the late summer, when many small employers have not yet finalized plans for the upcoming year. In 2004, a much higher percentage of small employers said they were likely to offer a plan in 2005 (12%) than actually did so (2%). So, while 11% of small employers this year say they are likely to offer a plan in 2006, this figure should be taken as an expression of interest rather than a projection. Jumbo employers, who solidify plans earlier in the year, are better able to provide accurate predictions for the upcoming year. Among this group, CDHP offerings are likely to rise to 29% in 2006 and to 31% in 2007 (Fig. 9).
HMO enrollment drops as employers offer fewer plan choices
One way for an employer that offers multiple health plans to save money is to drop one of their more expensive plans. In 2005, 8% of all large employers, and 31% of those with 20,000 or more employees, reduced the number of health plans offered. With HMO enrollment falling from 27% to 25% of all covered employees, it seems likely that the plans being dropped were HMOs (Fig. 10). Among the jumbo employers, who offer the most plans, the average number of HMOs offered across all sites fell from 18 to 12 (the median fell from 8 to 6). Five years ago, these very large employers offered an average of 34 HMOs.
"HMO plan design, with first-dollar coverage and office visit copays, insulates employees from the actual cost of care," says Mr. Bos. "But with employers focused on making employees into better health care consumers, they want more cost-sharing - and more transparent cost-sharing. This disconnect may explain the slipping HMO enrollment figures."
Prescription drug benefit cost rising more slowly than underlying Rx cost trend
One of the forces driving medical plan cost has been sharp prescription drug benefit cost increases, which peaked in 2000 at 18%. Employers responded by implementing tiered copayments to encourage greater use of generic drugs and preferred brand-name drugs - and to increase the employee share of the cost. In 2005, large employers reported that the increase in prescription drug spending at their last renewal was 11.5 %, down from 14.3% in 2004, suggesting that these efforts have had the desired effect (Fig. 11).
According to a Mercer pharmacy benefit specialist, the underlying drug trend, which is based on the actual cost of pharmaceuticals and the rate of utilization, is currently averaging around 15%.
In 2005, the use of three-tiered copayments in large employers´ card plans rose from 64% of employers to 68%. Perhaps more significantly, the use of coinsurance also rose, especially among jumbo employers, who are more likely to use a specialized pharmacy benefit manager. Now 14% of all large employers with card plans use coinsurance to share drug cost with employees, up from 11% last year. Among employers with 20,000 or more employees, 35% use coinsurance. The use of coinsurance directly helps to bring down cost trend, because the employee´s share of the cost goes up with cost inflation, unlike with a fixed copayment.
Average copayment amounts were relatively stable for card plans, but rose sharply in mail-order plans. In large employers´ three-tier mail-order plans, the generic drug copay rose from an average of $15 to $17; the preferred (formulary) brand-name drug copay rose from $33 to $39; and the non-preferred brand-name copay jumped from $57 to $69.
"Steep copays for non-formulary drugs and, to an even greater extent, coinsurance give employees a strong incentive to think about which drug they buy for a specific condition," says Mr. Bos.
Other findings
- Retiree medical coverage After years of slow decline, there was essentially no change in the percentage of employers providing retiree medical coverage. Among employers with 500 or more employees, 29% offer coverage to pre-Medicare-eligible retirees and 21% offer it to Medicare-eligible retirees (Fig. 12).
- Response to Medicare Part D A surprisingly high percentage of large retiree medical plan sponsors - 43% - say they will make no plan design changes at this time as a result of the new Medicare Part D benefit. (This may be due in part to timing; the survey was conducted in the late summer, and important information from CMS was not released until October.) Over two-fifths (44%) said they will seek the subsidy; 4% will offer a plan that wraps around an approved prescription drug plan (PDP); and 3% will contract with a commercial vendor to offer a PDP. But 2% say they will terminate all coverage for Medicare-eligible retirees, and another 3% say they will terminate drug coverage but continue to offer medical coverage (Fig. 13).
- Same-sex domestic partner coverage is on the rise, with 19% of all employers making it available in 2005, up from 11% last year. Now 27% of all large employers and 55% of those with 20,000 or more employees include domestic partners as eligible dependents (up from 24% and 47%, respectively).
- Bariatric surgery coverage The percentage of employers covering bariatric surgery fell slightly in 2005, from 27% to 24% of all employers. The larger the employer, the more likely they are to cover this procedure: 48% of all large employers, and 71% of those with 20,000 or more employees, do so.
- Spousal coverage Employers are not rushing to implement special provisions concerning coverage for spouses who have other coverage available. Just 7% of large employers have a special provision, unchanged from 2004; 15% of jumbo employers have such a provision, up from 12% in 2004.
Mercer´s comprehensive report on the National Survey of Employer-Sponsored Health Plans 2005 will be available in early March for $500. A separate appendix of survey responses to approximately 100 questions, broken out by employer size, region, and industry, costs an additional $500. To order, contact Tara Lewis at Mercer Health & Benefits, 1166 Avenue of the Americas, 29th Floor, New York, NY 10036, telephone 212 345 2451, or at http://MercerHR.com/ushealthplansurvey.
Mercer Health & Benefits is a business of Mercer Human Resource Consulting, the global leader for trusted HR and related financial advice, products, and services, which has more than 15,000 employees serving clients in more than 190 cities and 41 countries and territories worldwide. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific, and London stock exchanges.
