Contact:   Stephanie L. Poe                                       *EMBARGOED FOR RELEASE*
                    +1 202 331 5210                                          December 10, 2001, 12:01 a.m.
                    stephanie.poe@us.wmmercer.com

HEALTH BENEFIT COST UP 11.2% IN 2001
HIGHEST JUMP IN 10 YEARS

 With managed care unable to hold the line on cost, employers try other tactics.

• Cost rose 11.2% in 2001 for employers with 10 or more employees, with an increase of 12.7% expected for 2002.

• Cost for HMOs rising as fast as cost for less-managed PPO plans.

• Employers shed retiree medical plans.

• Prescription drug cost growth abates slightly as employers redesign benefits.

New York December 10, 2001 The average cost of health care benefits for active employees rose 11.2% in 2001, from $4,430 per employee to $4,924, according to a new survey released today by human resource consulting firm William M. Mercer, Incorporated.  This increase for a year in which general inflation has held to just 2.1% comes on the heels of an 8.1% increase in 2000.

The picture for 2002 is no brighter: employers expect their costs to rise by an average of 12.7%.  Some (15%) expect to be hit with increases of 20% or more.

More than 2,800 employers participated in Mercers survey, which is conducted using scientific survey methodology and has an error range of +/-3%.  The survey found that small employers (10499 employees) had an average total health plan cost of $4,649 per employee, up 11.6% from last year, while large employers (500 or more employees) had an average cost of $5,162, up 12.1%.  These figures include costs for all health benefits, including dental coverage, for employees and their covered dependents.

Small employers shifted cost to employees in 2001; now its the large employers turn

Health benefit cost has been rising faster than inflation for the past four years.  But while unemployment was low and profits high, employers moved slowly, if at all, to share increases with employees.  While the average dollar amount that employees contribute to the cost of coverage (through payroll deductions) has risen over the past few years, the percentage they pay has not meaning that employers have been absorbing the lions share of cost increases.  Deductible and copay amounts have remained relatively flat as well.

But at the end of 2000, with the economy slowing down, the smaller, more vulnerable employers took steps to shift more costs to employees in 2001.  Most notably, among small employers the median PPO in-network deductible jumped from $250 to $500 for an individual.  Deductibles of $1,000 or more were required by 17% of small PPO sponsors this year. 

Although there was no significant cost shifting among large employers in 2001, its clearly on the way.  Responding to the survey in the summer of 2001, 40% of large employers said they would require employees to pay a higher percentage of total cost in the upcoming year.  More than a third (34%) said they would raise deductibles, copays, or out-of-pocket maximums.

Blaine Bos, a consultant with Mercer and one of the studys authors, says, We cant expect the double-digit trend to abate over the next few years not with all those aging baby boomers still working.  Unless a new silver bullet materializes like managed care in the 90s this rising tide may become a full-fledged flood.

Managed care not managing much of anything

In the 1990s, many hoped that managed care plans as exemplified by the HMO would end the health care cost spiral permanently, by negotiating more reasonable fees with providers, managing utilization, and improving the quality of health care.

But today providers seem to have the upper hand in negotiations, and HMOs are backing away from utilization management as they struggle to overcome their image as heartless deniers-of-care.  The average cost of closed-panel HMO plans rose just as sharply in 2001 (12.2%, to reach $4,167) as did cost in the less-managed PPO plan (12.7%, to $4,544).  Point-of-service plans, which are open-ended HMO options, experienced an increase of 13.2% and average cost of $4,653.  Among large employers (500 or more employees), the HMO increase was an alarmingly high 15.0%, compared to a PPO increase of just 11.5%.

Although HMOs are often the least expensive type of plan available in the market, the percentage of employers offering an HMO slid a point in 2001, to 37%, while the percentage of those offering PPOs rose from 48% to 50%.  Enrollment in PPOs now stands at 46% of all covered employees, compared to just 33% in HMOs.  Enrollment in open-ended HMOs, or point-of-service plans, dropped two points, to 14%.  Just 7% of employees remain in traditional indemnity plans.

HMOs have been retooling in an attempt to compete more effectively against PPOs, particularly in the large-employer market.  Self-funding also is on the rise 13% of large-employer HMO plans are self-funded, up from just 7% last year.  Open-access HMOs, in which a participant may see a specialist without first seeking approval from a gatekeeper, are also increasingly common 25% of HMO sponsors offer this type of HMO, up from 15% last year.  These plans have found that the administrative expense of the gatekeeper a generally unpopular feature is no longer justified by the savings. 

HMOs find themselves in a tight box, says Mr. Bos.  Enrollment is flat, but providers are negotiating hard for better reimbursements and shareholders are demanding returns.

Retiree medical plans an early casualty in health cost battle

Perhaps in response to cost escalation, perhaps looking ahead with trepidation to the fast-approaching retirement of baby boomers, employers are continuing to shed retiree medical plans and few organizations are choosing to add them to their benefit offerings.  In 2001, the number of large employers (500 or more employees) offering medical coverage for pre-Medicare-eligible retirees fell from 31% to 29%, while the number offering coverage for Medicare-eligible retirees slid to 23% from 24%.  In 1995, these figures were 41% and 35%, respectively.

These figures refer to continuing plans ones that will cover all future as well as current retirees.  In 2001, an additional 5% of large employers maintain plans covering current retirees only.  While a few employers (1%) provide retirees with a subsidy to purchase coverage on their own, most do not.

Employers providing coverage for early retirees experienced an average cost of $6,642 per retiree in 2001.  Cost for Medicare-eligible retirees averaged $2,717 per retiree. 

One side effect of not offering retiree coverage is that employees wait longer to retire.  The median retirement age is 60 in organizations that offer retiree coverage to pre-Medicare-eligible retirees, and 65 in organizations that dont.

Prescription drug trend cools but still leads medical trend

Employer restructuring of prescription drug benefit design apparently has started to slow rising drug costs.  In 2000, employers reported an average drug trend of 17.5% at the most recent renewal of their largest medical plan.  In 2001, the trend cooled to 16.8%, and employers project an average increase of about 15% in 2002. 

This shift is likely due to employer-initiated changes in plan design.  In 2001, average employee copayment amounts rose across the board.  In mail-order plans with two-tier copayments, the average cost per-prescription rose from $9 to $11 for generic drugs and from $17 to $23 for brand-name drugs.  In addition, employers made a big move toward the use of three-tier benefit design where the employee pays the least for a generic drug, more for a brand-name drug on the plans formulary, and still more for a brand-name drug not on the formulary.  Now 35% of mail-order prescription drug plans use a three-tier design, up from 22% last year, as do 35% of card plans, up from 23%.  In three-tier mail-order plans, the average copayment for a non-formulary brand-name drug is $36.

Cost-shifting to employees tends to be a short-term solution to cost escalation.  But even if this trend continues to improve, prescription drugs only account for 17% of total medical plan costs.  Employers still have a cost crisis on their hands.

Employers search for new silver bullet

While employers will undoubtedly shift more of the pain of medical plan cost increases to employees next year, such a move is a first line of defense, not a long-term strategy, Mr. Bos notes.  Eventually, particularly in a faltering economy, cost-shifting creates morale and turnover problems as health care become less affordable for lower-paid employees. 

Larger employers with substantial market leverage are experimenting with a variety of cost management techniques such as managing vendor performance and group purchasing, says Mr. Bos.  And the market is working overtime to produce the next new thing.

One market-driven approach getting some attention is a consumer-directed health plan under which an employee is provided with catastrophic, or high-deductible, insurance for unpredictable health care expenses and a health care spending account for predictable expenses.  Seventeen percent of all employers but 29% of those with 20,000 or more employees said it was somewhat or very likely that they would move to such an approach within the next two years.

Only 13% of small employers (10499 employees) and 6% of large employers say it is somewhat or very likely that they will exit involvement in health care by terminating their health plans and giving employees extra pay to find coverage on their own.

Consumer-directed health plans are intriguing in that they will truly engage the consumer in the purchasing process while still in the framework of an employer-sponsored plan.  Thats new but is it a silver bullet?  Only time will tell, says Mr. Bos.

Other findings

• Increase in domestic partner coverage.  The percentage of large employers (500 or more employees) who consider same-sex domestic partners as eligible for dependent coverage rose from 12% in 2000 to 16% in 2001.  Over a third of the largest employers (those with 20,000 or more employees) extend coverage to domestic partners 34%, up from 24% last year.

• Internet/intranet use in benefit administration growing.  The number of large employers (500 or more employees) who use Internet/intranet applications in administering health benefit programs rose from 35% in 2000 to 44% in 2001.  Among the largest employers (20,000 or more employees), 83% do so, up from 67% in 2000.  The most common uses are to provide forms and access health and welfare benefit information.  More than one-fifth of all large employers (23%), and 54% of those with 20,000 or more employees, are conducting open enrollment for 2002 via Internet/intranet, although most of them will also give employees the option of paper enrollment.

• Majority of employers covers chiropractic, but not other forms of alternative medicine.  Two-thirds (66%) of employers cover chiropractic care through their largest medical plan.  But fewer than 15% cover acupuncture or massage therapy, and only 10% cover homeopathy.

• Dental benefits.  Comprehensive dental benefits are offered by 54% of all employers.  More than one-third of these employers (36%) offer a dental PPO, and 22% offer a dental EPO.  The cost of dental coverage averaged $512 per employee, an increase of 8.9%.  There was no change in either the median deductible ($50) or the maximum annual benefit ($1,000).
  Health benefit cost varies widely by region.  Comparing the four census regions, the overall average cost per active employee in 2001 reached $5,469 in the Northeast, $5,088 in the Midwest, $4,643 in the South, and $4,538 in the West.

• Use of spending accounts growing.  Flexible spending accounts for health care expenses are offered by 22% of all employers, up from 16% in 2000.  More than two-thirds of large employers (68%) provide an FSA, up from 62%.  Use of dependent care accounts rose from 16% to 21% among all employers, and from 66% to 70% among large employers.

About the survey  
The Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans is the largest and most comprehensive annual survey of its kind, with over 2,800 respondents in 2001.  The survey is conducted in accordance with rigorous statistical standards.  Mercer used a national probability sample of public and private employers and weighted the results to reflect the demographics of all employers in the US with 10 or more employees that offer health coverage.  Therefore, the survey results represent about 600,000 employers and over 90 million full- and part-time employees.

Copies of the National Survey of Employer-sponsored Health Plans 2001 will be available in early March for $500 each.  To order, contact Tara Lewis at William M. Mercer, Incorporated, 1166 Avenue of the Americas, 28th Floor, New York, NY 10036, telephone 212 345 2451.

William M. Mercer, Incorporated, one of the nations leading consulting organizations, assists employers in the areas of human resource strategy and implementation.  Headquartered in New York and with offices in 40 US cities, the firm is the US operating company of William M. Mercer Companies LLC, a worldwide consulting organization with some 13,500 employees serving clients from 136 cities in 40 countries. 
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Business writers and editors can reach Mercer consultant Blaine Bos in Chicago at 312 902 7664 for additional background and comment.  (Note: This phone number is provided for the convenience of journalists and is not intended for publication.)

Visit Mercer online:  www.wmmercer.com/us-news