Downturn Won't Dent Medical Inflation

Increases in health-care premiums and other medical costs have been decelerating in recent years, but those days may be gone, despite the general economic slowdown. Global HR consulting and outsourcing firm Hewitt Associates' annual study of initial HMO premium rates predicts an average increase of around 11.8 percent for 2009. That's a modest drop from last year's 13.2 percent, and in line with the 11.7 percent increase in 2007, but still "double digit increases, and still unsustainable long-term," says Jeff Smith, senior consultant with Hewitt Associates.

An analysis of medical cost trends from PricewaterhouseCoopers, released in June, tells much the same story -- a slight slowing from 9.9 percent this year to 9.6 percent in 2009. "We're seeing a flattening out now," says Michael Thompson, New York City-based principal in the firm's health and welfare practice. "Based on the historical patterns, we wouldn't be surprised if this was a bottoming, and in the next year or two we could start seeing an upswing."

Upward pressures on medical costs include a boom in the construction of health care facilities and hospitals' increased shifting of uncompensated costs from Medicare and Medicaid to the private sector, according to PwC. But the study also reveals that medical costs have a tendency to move contrary to prevailing price trends in recessions. While the consumer price index generally drops during a recession, medical prices tend to rise, though they may register an impact a year or two later.

So employers can expect to shoulder an increased health care burden for the coming year, and they may need to adopt some innovative approaches to do so.

Consumer-directed health care plans, on which many companies pinned their hopes for stemming the inflationary tide, are continuing to grow, but from a relatively small base, and they lack the critical mass to influence prices greatly at this time, according to Thompson.

Enrollment in these plans has stagnated, adds Smith. "Although it's going to continue to inch up, it probably won't be by the leaps and bounds that we once thought."

What's more, the cost-sharing strategies that so many companies have relied on in recent years might be about played out. Only 38 percent of employers surveyed by PwC reported that they expect to ask their workers to bear a larger share of medical costs next year. "For some employers cost sharing has already gotten to the level that it becomes increasingly difficult to envision that employees can accept ever-increasing percentages of the cost," notes Thompson. "It does challenge companies that see themselves as employers of choice to continuously shift the cost of the programs they're offering."

Instead, companies are putting more resources into prevention programs. Building participation can be a challenge, but "some employers have made a concerted effort to promote, and in many cases incent, participation, and in those instances we're seeing a significantly higher participation level," reports Thompson. "Employers who are simply offering wellness programs frankly aren't getting a lot of people participating in them, and it's questionable whether they're getting the bang for their buck in those instances."

Other strategies that companies are adopting to keep HMO costs in check, according to Hewitt Associates, include:

• Consolidating vendors. An increasing number of companies are seeking to gain purchasing power by pulling insureds from multiple health-care plans into a single program. "Instead of offering four relatively small plans, pick the most efficient, or maybe the one that's delivering the best healthcare outcome or helping to improve productivity the most," says Smith. Doing so can reduce health care premiums and administrative costs.

• Self-insurance. Some states require HMOs to pay a premium tax, and some mandate certain benefits such as mental health, chiropractic, and infertility treatments that drive up premium costs. By moving from a local or regional plan to a self-insured arrangement, an organization may be able to reduce or eliminate that spend.

• Dependent audits. These are gaining popularity as a way to ensure that a health plan is paying out only for dependents who qualify for coverage based on the employer's eligibility requirements. There's no implication that employees are being dishonest, notes Smith. "Often, just through the flurry of activity around annual enrollments, people may forget that one of the children is no longer in college. It's a question of making sure that everybody's on the same page."