In 2011, for the first time a majority of U.S. workers are expected to have health insurance deductibles of $400 or more, as more employers return to pre-managed care “indemnity style” cost sharing by raising out-of-pocket limits, replacing flat-dollar co-pays with percentage-based co-insurance, and adding high-deductible health plans. So finds research conducted by consultancy PricewaterhouseCoopers (PwC) in the first quarter of 2010.
The firm's research findings are presented in two reports issued in June 2010. In its annual Behind the Numbers: Medical Costs Trends for 2011 report, PwC said that U.S. employers can expect medical costs to increase by 9 percent in 2011, based on the projected increase in costs of medical services assumed in setting premiums for health insurance plans.
In comparison, a 2010 survey by the Council of Insurance Agents & Brokers found that most insurance brokers foresaw premium increases for small employer plans (with 50 or fewer enrolled employees) in the 11-20 percent range and premium increases for large accounts (those with more than 500 employees) in the 6-15 percent range (see "Brokers Say Group Health Rates Rising for 2011").
Holding Down Costs: Deflators
The PwC report outlines three primary deflators that are expected to help moderate the annual rise in health care costs:
• Employers are increasing deductibles and replacing co-pays with co-insurance. By requiring workers to spend more out of pocket at the point of care, employers believe that they will rein in utilization of services and drugs. The number of employers using co-insurance for physician visits has nearly doubled, and one-third use co-insurance for brand-name drugs. In addition, high-deductible plans were the most prevalent plan for 13 percent of U.S. employers surveyed in 2010, up from 6 percent in 2008.
• Drug costs are tempered by generics. Insurers are benefiting from the growing use of generic drugs. Prescription drugs that account for $26 billion in annual spending are expected to go off patent in 2011, including the world’s best-selling drug, Lipitor. Generics, which account for as much as 80 percent of prescriptions in some plans, continue to erode the market share of brand-name drugs, influencing medical cost trends.
• COBRA costs are expected to return to more normal levels in 2011. COBRA subsidies passed by Congress in 2009 created a 1 percent upswing in the medical cost trend. Laid-off workers who continued their health care coverage typically incurred medical costs of two to four times higher than those of other workers. In 2010, the combination of higher unemployment and new government subsidies to pay for COBRA coverage led to a significant increase in COBRA coverage. A combination of declining unemployment and expiration of the COBRA subsidies is expected to lead to reduced enrollment in COBRA in 2011.
Pushing Costs Higher: Inflators
Hospital and physician charges account for 81 percent of the health care costs for employer-provided plans, according to PwC, which found three key pressures expected to push these costs higher in 2011:
• Cost shifting from Medicare to private payers and employers is seen as the number one impetus for higher medical costs in 2011. Medicare, which is the single largest payer for hospitals, will reduce payment rates to hospitals in 2011 for the first time after seven years of increases that nearly matched or exceeded inflation increases. Some hospitals that benefited from higher payments in 2008 and 2009 might be able to manage this type of cut by tapping their reserves, but many are likely to shift more costs to commercial payers during their negotiations. (For more on Medicare cost shifting, see the SHRM Online article "Report: Best, Worst U.S. Cities for Hospital Value").
• Provider consolidation is increasing, giving providers greater bargaining power. More physicians are getting out of private practice and joining forces with local hospitals or larger physician groups. The number of physicians involved in mergers or acquisitions in 2009 was nearly twice that of 2008, and there has been record consolidation activity in 2010 as well—a trend that PwC expects to accelerate further in 2011. With less negotiating power, payers expect to face higher prices in the short term, although the benefits of consolidation should create efficiencies that moderate rate increases in the future.
• Hospitals will spend billions of dollars on electronic health record (EHR) systems, spurred by stimulus funding that begins in 2011 and Medicare penalties that begin in 2015. While many hospital systems were planning to implement EHRs in the near future, the government’s new regulations condensed dramatically the timelines to invest in technology, IT staff, training and process redesign. Health care executives surveyed by PwC said they will make their largest investments to meet the new EHR regulations in 2011. In the long term, EHRs are expected to help control costs.
Plan Design Changes
In PwC's related Health and Well-Being Touchstone survey report, improving wellness programs and increasing cost-sharing are the top changes employers are making in their benefit plan designs for 2011. According to PwC's research:
• Two-thirds (67 percent) of U.S. companies intend to expand or improve wellness programs.
• 42 percent intend to increase employee contributions for health insurance coverage.
• 41 percent intend to increase medical cost sharing, including higher deductibles and co-pays.
• 26 percent intend to increase prescription drug cost sharing.
Retiree Health Benefits
Another key finding: fewer employers are offering health benefits for retirees:
• One-third of employers with over 5,000 workers subsidized pre-65 retiree medical coverage in 2010, down from 47 percent in 2009.
• Only 22 percent of employers with over 5,000 employees subsidized post-65 retiree medical coverage, down from 37 percent in 2009.
(For more on employer plans dropping retiree health care, see the SHRM Online article "Employers Brace for Health Care Cost Increases, Remain Committed to Subsidizing Employee Coverage.")
PwC's research included a first quarter 2010 survey of 700 U.S. companies from 30 industries, ranging in size from under 500 employees (14 percent of respondents) to more than 20,000 employees (15 percent). In addition, PwC interviewed health plan actuaries and other health care executives whose companies provide coverage for 47 million enrollees.
Stephen Miller is an online editor/manager for SHRM.
Group Health Insurance Rates on the Rise for 2011, SHRM Online Benefits Discipline, June 2010
Employers Brace for Health Care Cost Increases, Remain Committed to Subsidizing Employee Coverage, SHRM Online Benefits Discipline, June 2010
Report: Best, Worst U.S. Cities for Hospital Value, SHRM Online Benefits Discipline, March 2010
Health Reform's Coverage Requirements Expected to Drive Premiums Higher, SHRM Online Benefits Discipline, April 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page