Employee Health-Care Costs Rose 7.9% in 1987

The cost of providing health-care benefits to employees jumped to an average of $1,985 per worker last year as employers hunted for new ways to control costs, a survey said Tuesday.

A poll of 2,016 corporate and government employers found that their costs rose 7.9% last year, or an average $128 per employee, said A. Foster Higgins & Co., which conducted the survey. The average cost had risen 7.7% in 1986.

Nearly one-fifth of the employers surveyed said their health costs soared 20% or more, according to Higgins, a New York-based benefits consultant. Six percent of the employers said they were hit with cost jumps exceeding 30%.

‘Disturbing’ Increase

“Increases in the actual price of medical care supplied by doctors, hospitals and other providers is the fundamental reason for the plan cost hikes,” said David Rahill, who directed the study, which looked at employers with a total of 13 million employees.

Higgins, a subsidiary of the privately held insurance broker Johnson & Higgins, surveyed employers ranging from American Telephone & Telegraph to the village government of Winnetka, Ill.

Public sector employers spent an average $2,071 to cover each worker, while the cost averaged $2,364 per worker for health benefits in workplaces that are at least 50% unionized, the survey found.

The economy-of-scale theory seems not to apply when it comes to health-care costs. The survey said employers with 5,000 or more workers paid an average $2,100 per worker last year, compared to $1,962 for employers with fewer than 5,000 workers.

Overall, health-benefit costs made up 9.7% of the payroll pie, up from 8.9% in 1986, an increase that Rahill called “disturbing.”

“Continued increases could hamper the ability of American business to compete with lower-cost labor markets,” he said, adding that higher costs could even spur companies to consider moving their operations.

Rahill said the study underscored the need for more stringent cost-control efforts. Only 30% of employers surveyed managed either to hold costs constant or reduce them last year, the survey found.

Digital Equipment Corp. was not in that category. The Maynard, Mass.-based computer giant saw its health-care costs skyrocket 16% last year, said Ed Brady, Digital’s U.S. employee benefits manager.

Because more than 50% of the company’s health-care costs is “hospital driven,” Brady said, Digital decided in 1984 to “put in a lot of review programs that employees must adhere to before they can be reimbursed.”

The process includes such procedures as getting a second opinion for certain hospital procedures.

Digital also hired a case management firm to explore alternatives to hospitalization for mental health cases. The firm might steer employees to halfway houses, for example, rather than the hospital, said Brady, who called the move “very successful.”

Higgins’ survey found that 61% of the employers polled did not require employees to help foot the bill on individual coverage.

But 88% did require their employees to pay a deductible, which is a convenient way to have workers shoulder benefit costs. About a third of the employers said they raised deductibles in the past two years, the study said.

More ‘Flex’ Plans Seen

“When costs are rising, we have charged employees more for health care, particularly in the areas of deductibles,” said Edwin Watson, a spokesman for Johnson & Johnson.

Like many other employers, Johnson & Johnson hopes that “programs geared toward keeping employees healthy” will help keep a lid on costs, Watson said. Under the “Live for Life” umbrella, the New Brunswick, N.J.-based pharmaceuticals and consumer products giant offers exercise programs, courses on how to stop smoking, diet seminars and substance abuse programs, Watson said.

The survey also found that many employers are adopting flexible benefit plans, which offer employees a choice of benefit types as well as levels of the particular benefit chosen.

While 15% of the responding employers said they already had implemented flexible benefit programs, that number is expected to double within a year, the report said.

“Employers with flex programs tell us they spent 6.1% less on health benefits per employee in 1987 than employers without such plans,” Rahill said.

According to the study, flexible benefit plans cost employers an average of $1,892 per worker, while costs for set plans averaged $2,008 per employee.