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Employers Look for Ways to Address Rising Health Care Costs

By Julie Athey
HR Hero

For most of the 1990s, employers that sponsored group health plans enjoyed a welcome period of low inflation in the cost of providing coverage to employees and their dependents. As recently as 1998, the average increase in the cost of health insurance was only four percent, right in line with the general rate of inflation. That trend changed abruptly in 1999 and 2000, when the average annual increase in the cost of health insurance was eight percent (more than twice the rate of inflation).

In 2001 and the years that follow, it's only expected to get worse. According to the National Health Care Trend Survey, a survey of health insurers, HMOs, and third party administrators conducted by Buck Consultants, employers' health care costs should increase this year anywhere from nine percent (for HMOs) to over 14 percent (for indemnity coverage). And that sounds almost optimistic compared to the Towers Perrin Health Care Cost Survey, which measures employers' expectations about their health care costs. Those who responded to that survey expected their health care costs to increase an average of 13 percent this year and continue to increase at a similar rate for the next five years.

The Primary Culprit

Although the spike in health care inflation has many causes, it is blamed primarily on one factor: the dramatically rising cost of prescription drugs. According to a recent report from the National Institute for Health Care Management Research and Educational Foundation, "Although expenditures for prescription drugs are still a relatively small portion of overall health care spending (around 9% in 2000), the rise in drug spending in the last few years has contributed disproportionately to an upturn in health care costs and health insurance premiums." (Note: This survey is available on-line at www.nihcm.org/spending2001.pdf. Be patient; the web page takes a little while to download.)



Spending on retail prescription drugs went from $111.1 billion in 1999 to $131.9 billion in 2000. That's an increase of 18.8 percent. Plus, prescription drugs accounted for 44 percent of the overall health care spending increase in 2000, compared with spending for physician care, which accounted for 32 percent of the increase, and hospital services, which accounted for 21 percent.

The survey also points out a fact that is probably more directly relevant to our readers, and that is that some researchers have attributed a full one-third of the cost increase for employer-based health insurance on the rise in prescription drug costs.

Common Cost-Cutting Measures

Needless to say, many employers (not to mention their employees) are worried. When the cost of providing a benefit rises dramatically with no end in sight, the natural assumption is that employers will discontinue that benefit entirely. Fortunately for employees who depend on employer-provided health insurance, that's not likely to happen according to one recent survey. Most of the 360 employers who participated in the Sixth Annual Purchasing Value in Health Care Survey, conducted by Watson Wyatt, said they plan to remain highly involved in health benefits activities for at least three more years.

Past practices seem to bear that out, at least in part. Although most employers have surely been concerned about rising costs, the tight labor market has mostly overshadowed that concern. This is simply a reflection of the reality that most employers consider providing health insurance an absolute necessity to attract and retain qualified employees.

It's unrealistic to think that employers will be able to continue absorbing the higher costs as most of them have in the past. Instead, most employers are looking for ways to reduce their health care costs in lieu of discontinuing health insurance benefits altogether. In light of the statistics detailed above, it's not surprising that one of the most popular routes is to limit the benefits provided for prescription drugs. This could mean:

• Higher copays.
• Three-tier prescription drug copays (employees pay the least for generic drugs (usually $5.00), more for brand-name medications on an approved list called a formulary (usually $10.00), and even more for non-formulary drugs (usually $20.00)). Approximately 86 percent of HMOs used three-tier copayments in 2000, up from only 55 percent in 1998.
• Replacing copays with a plan where employees pay a given percentage (usually 20 percent) of the cost of each drug. The benefit could be narrowed even further by having employees pay a higher percentage for optional medications (such as a nasal allergy spray) than for something chronic like high blood pressure pills.

But drugs aren't the only factor in rising health costs, so attacking them alone won't work for many employers. Some other increasingly popular ways to reduce health care costs include:

• Higher deductibles.
• Requiring employees to pay some portion (or a higher portion) of their premiums. It's been reported that between 1994 and 1999, the number of companies that paid all of their employees' health care premiums dropped by 50 percent.
• Higher copays for office visits, hospitalization, and outpatient care.
• Reducing costs by using the Internet to administer benefits and distribute health care information.
• Using aggressive negotiating tactics to get health plans to reduce their premiums.
• Promoting employee wellness through such methods as smoking cessation and weight loss programs, among others.

Copyright 2001 M. Lee Smith Publishers LLC. This article is an excerpt from BENEFITS & COMPENSATION LAW ALERT. Benefits and Compensation Law Alert is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that neither the author(s) nor its publisher is engaged in rendering legal, accounting, or other professional services through its pages. If legal advice or other expert assistance is required, the services of a competent professional should be sought. (From a Declaration of Principles jointly adopted by a committee of the American Bar Association and a committee of Publishers and Associations.)