Health care costs expected to rise 7% to 10% in '99

U.S. employers can expect health care cost increases of 7 percent to 10 percent in 1999 after relatively modest increases of 3.7 percent in 1998, according to the human resources consulting firm Hewitt Associates.

If 1999 estimates hold true, Hewitt's data show health care costs will rise from a national average of $4,033 per employee in 1998 to between $4,315 and $4,436 in 1999, according to a Hewitt press release.

The firm is predicting '99 health care cost hikes in the range of 6 percent to 9 percent for health maintenance organizations (HMOs) and point-of-service (POS) plans, 5 percent to 8 percent for preferred provider organizations (PPOs) and 9 percent to 11 percent for traditional indemnity plans, based on its work with more than 2,000 health plans and 200 employers across the country.

"Employers are seeing some of the most dramatic health care cost increases in five years as managed care plans try to recoup financial losses by raising prices. That, coupled with rising drug costs, an aging population and a proliferation of health care legislation, is causing health care costs to escalate at a rapid pace," said Jack Bruner, national health care practice leader for Hewitt Associates, in the release.

Cost differences by plan type. While rate hikes of 7 percent to 10 percent are expected across all plan types next year, increases in 1998 were relatively flat with the exception of indemnity plans.

According to the Hewitt Health Value Initiative, a cost and performance analysis of more than 2,000 health plans in 139 U.S. markets, 1998 national costs for HMOs rose 1.8 percent to $3,532 per employee, POS plans increased 1.5 percent to $4,012, PPOs rose 4.1 percent to $4,312 and indemnity plans increased the most, at 9 percent, to $4,910.

"Unlike indemnity plans, managed care plans have kept costs relatively flat in recent years by offering discounts through provider networks and, in some instances, significantly lowering rates to gain market share," Bruner said.

"Now, not only are their prices rising, but the one-time cost savings employers achieved by moving employees from indemnity plans to more cost-effective managed care plans is gone now that nearly 85 percent of employees are enrolled in managed care," he added.

Regional cost differences. Each region of the country is also expected to see increases of 7 percent to 10 percent next year, whereas in 1998, different regions of the country noticed varying increases. According to Hewitt Index data, 1998 health care costs rose 4.8 percent to $4,113 per employee in the central region, 3.4 percent to $4,155 in the east and only 1.8 percent to $3,578 in the west.

"As the birthplace of managed care, the West Coast has taken advantage of years of experience in managing health plans and networks to keep its costs relatively flat in recent years," Bruner said. "However, as managed care plans attempt to recoup financial losses by raising prices in 1999, unfortunately employers in every region of the country, including the West, will feel the effects."

Differences among major U.S. markets. Insurance hikes are also expected to affect most major U.S. markets next year, unlike 1998 when some markets were harder hit than others.

Hewitt Index data reveal that among the top 20 U.S. markets, health care costs increased the most in Minneapolis/St. Paul, at 6.7 percent, and Philadelphia, at 5.6 percent, with both markets seeing increases of at least 7 percent among indemnity plans.

In contrast, Tampa Bay's health costs dropped 2.6 percent and Los Angeles' costs decreased 2 percent, with both markets noticing decreases among HMO, PPO and POS plans.

"Some markets have experienced lower cost increases because of higher competition between managed care plans and higher percentages of their population shifting into managed care," Bruner said. "However, now that managed care is fairly prominent in most major markets, rising costs will affect markets more evenly in 1999."

Effects of cost increases. How will employers respond to the '99 cost increases? "Most likely, they will have to shift some of the higher costs along to employees," Bruner said. "And to gain better deals in the future, they will increasingly look for the most cost-efficient networks in each community, rather than only using a national network."

Hewitt Associates LLC is a global management consulting firm specializing in human resource services.

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