Firms’ Spending on Health Care Up 6.1% in ‘98, Survey Finds

The amount of money spent by American businesses on health care for their workers went up 6.1% in 1998, increasing almost four times faster than the national rate of inflation and prompting employers to pass some of the increased costs along to workers, according to a major study on health benefits released Monday.

The spike in costs, which rose from an average of $3,924 per employee in 1997 to $4,164 in 1998, marked the largest increase in the five years since managed care virtually stopped health-care inflation in 1993.

And the survey, conducted of 4,181 employers by the employee benefits consulting firm William M. Mercer Inc., showed that most U.S. companies expect costs to rise further, by about 9% this year. The survey included firms of all sizes, ranging from 10 employees to more than 500.

Most of the increase came from higher premiums charged by health insurance companies, the study said. Insurers, struggling with low profits and consumer demand for greater choice, raised rates last year and expect to do so again.

Another key component was the skyrocketing cost of prescription drugs. On average, employers spent 13.8% more on prescription drugs for their employees in 1998 than in the previous year, the survey found.

The increase in costs was accompanied by a 3% drop in the percentage of employees enrolled in health maintenance organizations. The drop could be seen as the beginning of what some experts predict will be an ongoing exodus from HMOs, restrictive managed-care plans that control access to doctors and hospitals.

“This is an indication of trouble in the success of managed care,” said Kirby Bosley, a principal in William M. Mercer, a New York-based firm that conducts the employer health-care cost survey every year. “I don’t think we’re ready to throw up our hands and say we give up on HMOs, but there are clearly issues to be addressed.”

The survey results come at a difficult time for the managed-care industry, which has been struggling recently with annual profit margins of about 2% and is widely seen as a target for increased government regulation.

In the Northeast and Midwest, the survey showed what Bosley called a backlash against HMOs, which many consumers believe limit access to important care in an effort to save money.

Both regions, Bosley said, showed an increase in the number of employees enrolled in the less-restrictive health plans known as preferred provider organizations, or PPOs, which allow patients to see any doctor in a fairly large network without a referral or prior authorization. In the Northeast, she said, membership in preferred provider organizations increased from 23% of employees in the companies surveyed in 1997 to 31% in 1998.

Health maintenance organizations, meanwhile, showed membership declines in both regions.

About half the large employers surveyed said they were concerned that consumer dissatisfaction with HMOs will mean that more states--and perhaps the federal government--will repeal restrictions on lawsuits against employer-provided health plans, the survey showed.

To that end, according to the study, many large employers have purchased extra liability insurance, and others have negotiated protections from lawsuits in their contracts with HMOs.

In Los Angeles, however, the picture was more stable, with HMO membership remaining constant at 57% of employees in large health plans. Similarly, the cost of employee health care remained steady here, increasing just 1.1% over 1997.

The reason, Bosley said, is that the managed-care market is more mature in Southern California, where some HMOs have been in place for decades. Additional incentive to keep costs down comes from the way most HMO doctors are paid here. Doctors or physician groups tend to be paid a set amount each month to care for patients instead of receiving a separate fee each time a service is performed.

Also, Bosley said, although the average increase in Los Angeles was low, many area employers did experience hefty premium increases.

To combat the increased costs, employers employed a variety of tactics, including dropping coverage of retirees. Eighteen percent of large employers increased the amount that employees must pay for prescription drugs, the survey found.

“They [employers] are talking about making plan changes in 2,000,” Bosley said, “shifting costs to employees [and] changing health plans.”

More employers are investigating setting up self-insurance funds to take care of their employees’ health-care needs, Bosley said, and others are attempting to develop collaborative models, in which both the health plan and the employer would share costs and some risk.