Wall Street Journal
January 20, 1998
Benefits Costs Kept in Check, But Future Inflation
Is Likely
By RON WINSLOW
Staff Reporter of THE WALL STREET JOURNAL
America's employers held health-benefit costs at bay for another year in
1997, but the prognosis for continued low medical
inflation appears bleak.
An unexpectedly strong surge of workers into managed-care plans last
year helped hold the increase in overall medical costs for active and retired
employees to just 0.2%, according to the annual Mercer/Foster Higgins
survey, a widely followed barometer of employer health
costs.
The performance was the most-impressive effort since 1994,
when corporate health-care costs actually fell 1.1% after several years
of mostly double-digit medical inflation.
The survey found that 85% of American workers with health
insurance now belong to some kind of managed-care plan, up from 52%
in just four years. That surprising migration has been at the root of
corporate America's success in reversing several years of double-digit
inflation in the late 1980s and early 1990s.
But it also means the days of holding down costs by moving employees to
lower-cost health plans essentially are over. "Now that they have driven all
of their people into managed care, employers have to worry just where the
costs go now," says John Erb, a principal at William M. Mercer Inc., a
Washington, D.C., benefits consultant, and the chief
author of the report.
Indeed, more than two-thirds of the nearly 4,000 employers who
participated in the survey are planning for health-cost increases of 7% in
1998. Estimates from other sources range from 6%
to 10%.
"This is the last time we'll see flat growth for the next 10 years," says
Kenneth S. Abramowitz, an analyst at Sanford C. Bernstein
& Co.
Strong Medicine
Percent of all employees with health benefits, by type of plan
| Traditional fee-for service | ||
| Preferred Provider Organization
(least restrictive) | ||
| Point-Of-Service
(moderately restrictive) | ||
| Health Maintence Organization
(most restrictive) |
Note: all types of plans except traditional are considered managed-care
Source: William M. Mercer Inc.
The survey found that total health-benefit costs averaged $3,924
per
employee last year, up from $3,915 in 1996, when costs rose 2.5%. The
results surprised Mr. Erb, who had expected a jump of as much as 4% for
the year.
The survey suggests that for every employee who switched into managed
care, employers' savings ranged from an average of $40 to $356,
depending on the type of plan. But while managed-care plans are priced
lower than traditional insurance, the gap is narrowing as traditional insurers
try to price their products competitively. Employers that didn't shift a
significant number of new workers into managed care last year
experienced health-cost increases of 3% to 4%.
The astonishing managed-care membership growth carries costs. Many
new enrollees sign up for "preferred provider organizations" or for "point
of service" HMOs. These plans were devised by the managed-care
industry because many patients were balking at traditional HMOs that set
up onerous rules for gaining access to doctors and
procedures.
"The tight HMO network operation isn't succeeding in today's market,"
says Scott Serota, chief operating officer of Blue Cross and Blue Shield
Association, a Chicago trade group. "People want more options, more
benefits and make more demands. That costs more money."
But in their drive to attract members, managed-care companies have
offered such plans with aggressive prices that threaten profitability and
other measures of financial health. Mr. Serota acknowledges many Blue
Cross and Blue Shield plans around the nation are posting operating losses
on their medical operations.
In the past, managed-care plans were criticized for cherry-picking, or
aiming their recruiting efforts at the healthy population that wasn't likely to
visit the doctor much. But now that managed-care plans have 85% of
covered employees, many high-cost members have joined their rolls.
Those patients are driving up the portion of premium revenues that the
plans must spend on medical care.
The survey comes as the managed-care industry, the private sector's chief
agent in controlling health costs, is under siege. Several leading companies,
including Aetna Inc.'s Aetna U.S. Healthcare unit, Oxford Health Plans
Inc. and Pacificare Health Systems Inc. have taken financial hits recently
because they underestimated health costs and struggled with troublesome
information systems.
That is one reason why HMOs around the U.S. have set higher rates for
1998 and are likely to seek hefty increases in the
future, some analysts say.
Meantime, new technology and changing regulations are continuing to put
pressure on employer health costs. For instance, new medications for such
conditions as depression and heart disease are leading to sharp increases
in employer prescription-drug costs. Employers hope that increased
prescription-drug use will lead to lower costs for hospitalization and other
care.
So far, though, such savings haven't shown up on employer health-cost
reports. "It's not an immediate return on investment," says Alan Peres,
manager, health policy, at Ameritech Corp., Chicago. "Several years in the
future, maybe we can find reduced admissions for a heart attack and
perhaps attribute it to a particular prescription
drug."
The Mercer/Foster Higgins survey also found that more large employers --
those with more than 500 employees -- covered in vitro fertilization, a
high-technology treatment for infertility, last year, while smaller employers
were dropping the coverage.
The flat growth trend last year was also affected by reduced costs for
retired workers. Mr. Erb says the number of employers who provide
coverage for early retirees declined to 38% from 40% in 1996, the
fifth-consecutive year of a gradual falloff in such benefits. Just 31% of
companies provided benefits to retirees eligible for the federal Medicare
program, down from 33% a year earlier.
Those that continue to offer such coverage are aggressively moving
retirees into managed-care plans. Just 30% of early retirees, for instance,
were in traditional fee-for-service plans last year,
down from 48% in 1996.
The survey also found wide variations in health-cost trends depending on
the employer's size and location. Costs for small employers -- those with
less than 500 employees -- declined 0.7% to an average of $3,357, while
those with 500 or more workers rose 0.9% to an average of $4,369.
Even though large employers often have more negotiating power to hold
costs in check, they typically offer richer benefits than smaller companies,
which often enroll all their workers in a single
plan.
Companies in the Northeast had the highest overall health-care costs, at
$4,453 per employee, up 1.9%, while large employers in that region
broke the $5,000 barrier for the first time, reporting
a 6.2% jump to $5,199.
Midwestern employers reported the most significant shift out of traditional
indemnity-insurance plans. As a result, their costs fell 4.7% per employee
to $4,047. In the South, typically the least costly region, the average cost
rose 3.7% to $3,505, while in the West, the most heavily penetrated
managed-care market, costs for the average employer fell 1.8% to $3,797.