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Towers Perrin Health Care Cost Survey Shows Average Annual Per-Employee Cost of $9,660 in 2009 — and the Health Care Affordability Gap Widens

September 24, 2008

New data from Towers Perrin indicate that the business and social impacts of rising health care costs still loom large, but also that leading companies are successfully mitigating that threat through a variety of health-focused management techniques that are paying off in significant ways — and point toward broader solutions to the cost crisis.

“The most striking result of our survey is the contrast between the high- and low-performing companies, said Dave Guilmette, Managing Director of the Towers Perrin Health and Welfare practice. “The high performers will pay, on average, 14% less in 2009 — a differential that quickly adds up to millions of dollars in annual savings for companies and for their employees. While high-performing companies spend almost $1,500 less per employee overall, $350 of those savings, on average, are shared with employees in the form of lower contributions. This shared ‘health dividend’ also creates important workforce performance advantages, as reported by these organizations — such as high employee engagement. Overall, the high performers are reaping a health dividend that can be a source of true competitive advantage and a model for the health care reform debate.”

According to Towers Perrin’s annual Health Care Cost Survey, the average corporate health benefit expenditure in 2009 will be $9,660 per employee–an increase of 6% over 2008 figures. The 6% growth rate will make 2009 the fifth consecutive year of single-digit percentage increases. However, many companies and their employees will still face record-high dollar costs in 2009, which is sure to deepen concerns about affordability, particularly for lower-wage workers and pre-65 retirees. Underscoring the growing affordability gap, the Towers Perrin survey database shows that total health care costs have increased by 33% since 2004, with the employee share increasing by 42% during the same period. (see Exhibit 1)

This year’s survey also reveals dramatic variations in per-employee costs among Fortune 1000 companies, clearly demonstrating that some companies have found ways to effectively control ongoing cost increases (see Exhibit 2). In the past, beating CPI was an anomaly, but today 42% of high performers have managed to hold their costs at 3% or less. Employees at high-performing companies share in this success, paying on average $350 less than employees at low-performing counterparts. What’s more, the study shows that high performers are also achieving important workforce management advantages that have significant competitive value in today’s highly stressed business environment.

The 2009 Towers Perrin Health Care Cost Survey marks its 20th consecutive year of providing the industry’s most in-depth, prospective (versus retrospective) look at health care costs for employers. The 2009 database includes detailed information on the health benefit programs provided by 321 of the nation’s largest employers. These companies provide health care coverage to 6.6 million U.S. employees, retirees and dependents, collectively spend $32 billion on health care every year and, as such, represent a significant force for change in the health care marketplace.

The Quiet Revolution

Four years ago, the Towers Perrin survey became the first to view the health benefit landscape through a performance lens based on costs and effectiveness. Over the same period, the data have consistently shown double-digit cost differentials between companies designated high performers and those managing their programs less effectively.

“The cost differentials are important, but the real story is the underlying revolution in employer strategies driving those results,” said Guilmette. “After four years of looking at the differences between high- and low-performing companies, we’ve gained definitive insights into which actions tip the scale the right way for both employers and employees, and which approaches deliver a health dividend for the company — in terms of both hard dollars and ‘softer’ assets, such as employee performance and productivity, recruiting, internal and external branding, and stakeholder relations.

“The common theme is the business value of health,” adds Guilmette. “Rather than focus on managing the cost of illness, high-performing companies are focusing more on managing the health of their workforces. Simply put, high-performing companies see that good health is good business.”

The Growing Affordability Gap: 2009 Costs for Active Employees and Retirees

The 2009 cost numbers add another chapter to the continuing story about affordability and provide yet more fuel for pre-election policy debates.

As in previous years, the survey indicates that employers will shoulder the lion’s share of the 2009 cost burden, subsidizing, on average, 78% of next year’s premium costs and asking employees to cover the remaining 22%, plus usage-based copays, deductibles and coinsurance. However, while the employee percentage share has held steady in the last few years, the actual dollar burden has grown due to the ever-increasing cost base and the added impact of benefit design-related increases in out-of-pocket costs.

Analyzing the 2009 data by coverage level, the average reported cost of medical coverage for active employee-only coverage is $4,860 per year and, for family coverage, $14,244 per year (see Exhibit 3). While these numbers are impressive in themselves, the impact of current health care costs and cost increases is starkly evident when compared with wage increases over the past eight to 10 years — an analysis that reveals a growing affordability gap and significant erosion over time in compensation values and employee purchasing power (see Exhibit 4). And even though employees at high-performing companies are doing better overall, they are still feeling the legacy impact of years of rising costs, despite the best efforts of their employers today to keep costs down.

Meanwhile, total costs for retirees (both pre- and post-65) will increase 5% in 2009 — just under the 6% rate for active employees but still well above core economic inflation.

“The big story here lies in the cost increases for pre-65 retirees who are not yet eligible for Medicare,” said Guilmette, “While successful employers have achieved sustainable levels of cost increases for their active employees, and Medicare eligible retirees have access to a robust Medicare Advantage product marketplace, costs for employees who retire before age 65 are skyrocketing. As employers continue to get out of the game of subsidizing and sponsoring retiree health care, pre-65 retirees are left to shoulder the cost burden.”

The total annual cost for pre-65 retirees is the highest in the Towers Perrin survey, at $13,308. These retirees are expected to pick up $6,960, or 52%, of this amount, which is 66% more than they paid just 5 years ago. Putting these numbers in historical context, the total cost in 2004 was $10,752, with retirees paying $4,200, or 39%. Making the comparison to today’s numbers, total costs for pre-65 retirees have increased 24% over the past five years, but these retirees are now picking up a bigger share. Looking ahead, Towers Perrin predicts that, within five years, pre-65 retirees could be paying as much as 80% of the cost of health care coverage.

These statistics give evidence of continued cost shifting to retirees, as employers are forced to rethink their financial commitment to retiree medical benefits, explore alternatives to traditional company-sponsored coverage and add resources to assist employees in retirement planning. Clearly, “retirement readiness” and cost management are dual concerns:

— The majority of survey respondents (63%) say they believe it’s important to the company that employees are financially prepared to retire.

— Just under half (48%) say they provide tools to help employees model wealth accumulation needs.

— Only 44% are confident that their programs give employees opportunities to prepare themselves financially for retirement.

— A significant number (over 40%) are considering offering Medicare Advantage options, such as Medicare Advantage HMOs, PPOs or private fee-for-service plans (with or without an employer subsidy).

— About 40% are considering eliminating their employer-sponsored drug coverage for post-65 retirees and replacing it with Medicare Part D plans.

“This year’s survey once again highlights the significant shift away from employer-sponsored retiree medical coverage and the serious affordability issues that follow for both active employees and current retirees,” said Ron Fontanetta, a principal in the firm’s Health and Welfare practice. “While the data offer evidence that employers are looking for ways to both manage their costs and equip employees to prepare for medical expenses in retirement — by, for example, offering health savings accounts — shortfalls remain. And this trend could unintentionally force some older workers to stay in their current jobs for no other reason than to get health care coverage.”

Beyond the Averages: High Performers Save Millions

Despite overall evidence of a growing affordability gap, the survey data also show that employees at high-performing companies are seeing lower costs than those at low-performing companies, a data point that puts to rest speculation by some that high performers hold costs down by shifting the burden to employees (see Exhibit 2). For example, not only are per-employee costs $1,464 lower on average at high-performing companies, but the percentage increase in the employee portion is significantly lower at high-performing companies than at low-performing companies (7% versus 10%).

High performers also show success in holding down costs across all plan types. Notably, high performers offering account-based health plans (ABHPs) with a health savings account (HSA) feature are keeping the total per-employee cost under $6,700–a figure well below the low-performer cost ($7,584), as well as overall costs for other plans.

“When you apply the high/low performer cost differential to a company with, say, 10,000 employees, the results can make a huge difference in program expense,” notes Fontanetta. “As an example, a high-performing company with a workforce that size would save an average of $15 million over a low-performing company’s costs in 2009 alone.”

Continuing Cost Differentials Point the Way to Success

The difference between high- and low-performing companies can be boiled down to a few key elements: High performers focus primarily on supporting and improving employee health; they also commit to rigorous — and continuous — management of their health plans and delivery processes (see Exhibit 5).

— 78% of high performers — versus 38% of low performers — say their company plays a major role in identifying and managing health risks/conditions in the employee population.

— 76% (versus 31%) say they’re committed to building a culture of health in their organizations.

— 87% (versus 63%) say their company views employee health as a critical component of superior business performance.

Looking at the actions that lead to success, the survey shows that high performers:

— Clearly articulate their strategies. Fully 84% of high performers say they use results measures to build action plans for performance improvement, versus 43% of low performers.

— Engage leaders. The vast majority of high performers (86%) say that they have secured senior management involvement and that management involvement is a critical performance factor (compared to 57% of low performers).

— Understand their employee populations. Three-quarters of high performers measure employee health status and risks by population segment (compared to 46% of low performers).

— Engage employees. Most high performers (65%) provide health care communications, employee education and access to health information year-round (compared to only 34% of low performers).

— Optimize investments. Fully 80% of high performers say they take steps to align subsidies and resources with employees’ most significant needs (compared to only 29% of low performers).

— Support employee health. Seventy-four percent of high performers say they actively help employees understand and manage their health and health risks (compared to only 22% of low performers).

— Measure for success. The majority of high performers say they measure such critical success factors as employees’ understanding and use of resources and tools (81% of high performers vs. 47% of low performers) as well as employee attitudes and understanding of their benefit programs (82% of high performers versus 53% of low performers).

Broadly speaking, high performers build employee health into their business strategies and organization cultures.

“As companies that produce the best cost outcomes share the dividends of success with employees, they also reap the benefits of increased employee engagement.” said Martha Terry, global practice leader for Rewards Communication at Towers Perrin. “In turn, employees are more likely to believe their company cares and engage more readily in the employer’s health management and wellness initiatives. These companies are truly creating a culture of health where programs, vendors, technology and support are all aligned to improve workforce health.”

High Performers Get Results

By a number of measures, high performers far outpace low performers in encouraging desired employee attitudes and behaviors (see Exhibit 6). Insights into the employee response to health-focused employer initiatives include:

— 89% of high performers say employees accept the role and responsibilities required of them by their health plan (versus 58% of low performers)

— 86% of high performers say employees are comfortable with the level of financial risk they must take on in their plans (versus 65% of low performers)

— 69% of high performers say their employees are engaged (versus only 36% of lowperformers).

Other Towers Perrin studies have shown that employee engagement is critical to overall company success, as engaged employees are more likely to invest discretionary effort in their jobs, improving overall company performance and competitiveness.

“Employee engagement has been shown to correlate closely with positive financial results and is clearly a product of company culture,” adds Terry. “Our current survey indicates that employers who focus on health are more likely to have the right culture.”

ABHPs on the Rise

Account-based health plans (ABHPs) are emerging as a solution that employers are embracing in the battle to maintain affordability for employees and retirees. These plans, particularly those featuring tax-favored savings opportunities, offer significant advantages in the current environment, and policy makers will undoubtedly continue to focus on them for that reason.

This year’s survey shows:

— Over half of the companies in the survey are offering or will offer ABHPs in 2009 versus 46% last year (including plans with either health reimbursement accounts (HRAs) or health savings accounts (HSAs))

— Most ABHPs set for implementation in 2009 will have an HSA feature (rather than an HRA feature), indicating employers’ interest in providing wealth accumulation vehicles for retiree medical benefits.

— 58% of high performers say their ABHPs are meeting objectives for controlling employee costs (versus 14% of lowperformers).

However, while ABHPs are delivering lower costs, survey results indicate that employers and employees still have work to do to more effectively use these plans to support the wealth accumulation that active employees will need when approaching retirement:

— Enrollments in ABHPs are still relatively low (about 20% of a company’s eligible population, on average).

— Only half of employees participating in HSA-based plans, on average, actually contribute to the account.

“These findings indicate that employers and employees may not yet have developed the mindset required to take full advantage of this new benefit approach — an important opportunity in a world where affordability is a chronic problem, and employer-provided retiree medical benefits are quickly becoming a thing of the past,” observes Fontanetta.

Advancing the New Frontiers

The survey gives evidence that employers are beginning to explore new ways to support employees in managing their health and, in many cases, high-performing companies are leading the charge. Lifestyle coaching, on-site biometric screening and electronic personal health records are a few examples. Similarly, leading companies are exploring newer and more innovative approaches to pharmacy program management, such as opening on-site pharmacies or implementing value-based designs for drug benefits.

“Employers have always been key players at the forefront of change in the health care marketplace,” observes Guilmette. “Not surprisingly, as the pre-election health care debate intensifies, few of our survey respondents say they’re happy with the status quo. But it’s also clear that they’re not sitting still and waiting for government to make change happen. They’ve already moved the market to a new place — with a new focus on the value of health for individuals, businesses and communities.”

Where We’ve Been, Where We Are, Where We’re Headed: 20 Years of Analysis

To mark the 20th anniversary of the Towers Perrin Health Care Cost Survey, Towers Perrin has taken a look back at how employer-sponsored health care has evolved over the past 20 years as a way to better understand future trends. In particular, Tower Perrin reviewed key trends in health care costs, enrollment, plan design, population health, prescription drugs and retiree medical.

Here’s a summary of that analysis:

 20 Years Ago               Today                 The Future ---------------------------------------------------------------------- Annual cost to provide  Annual cost to provide  At current trend coverage for a single   coverage for a single   rates, annual costs employee: $1,480        employee: $4,860        will double in 10 years ---------------------------------------------------------------------- Annual cost to provide  Annual cost to provide  Continued current rate coverage for a          coverage for a          of employer cost family: $4,040          family: $14,244         shifting may quadruple contribution amounts for employees and dependents in ten years (assumes 2% annual cost shift) ---------------------------------------------------------------------- Average employer share  Average employer share  There will be movement of premium: 76%         of premium: 78%         toward higher employee cost-sharing levels through plan design shifts such as high-deductible health plans ---------------------------------------------------------------------- Average employee        Average employee        Continued increases in annual contribution:    annual contribution:    employee $230                    $972                    contributions are anticipated as employers look to limit or freeze their financial commitments ---------------------------------------------------------------------- Average annual cost     Average annual cost     U.S. medical costs increase: 15%           increase: 6%            will continue to outpace inflation ---------------------------------------------------------------------- Americans spent $558    American are projected  Americans are billion on health       to spend $2.6           projected to spend care                    trillion on health      $4.3 trillion on care in 2009            health care in 2017 ---------------------------------------------------------------------- Health spending         Health care spending    In 2017, health accounted for 11% of    is projected to         spending is projected the GDP                 account for 17% of      to account for 20% of the GDP in 2009         the GDP ---------------------------------------------------------------------- Nation's health bill    2009 projections:       2017 projections: was paid by:                     -- Government - 46%     -- Government - 49% -- Government - 41%     -- Private insurers -   -- Private insurers - -- Private insurers -    42%                     41% 38%                    -- Individuals - 12%    -- Individuals - 11% -- Individuals - 21% ---------------------------------------------------------------------- 65% of private-sector   47% of large employers  Within the next 10 employees had           subsidize retiree       years, it is employer-based          medical costs           anticipated that 90% retiree medical                                 of private-sector coverage                                        retirees will pay the majority of the cost of their health care coverage ---------------------------------------------------------------------- Annual cost to provide  Annual cost to provide  Employers will retiree coverage:       retiree coverage:       continue to exit -- Retirees under 65:   -- Retirees under 65:    sponsorship for $1,685                  $7,236                  Medicare-eligible -- Retirees age 65 or   -- Retirees age 65 or    employees; account- over: $853              over: $3,576            based plans may fill the void with tax- effective employee savings to cover post-retirement medical expenses ---------------------------------------------------------------------- Health insurance        Market consolidations   Additional health plan market is fragmented,   result in fewer         consolidation is with multiple Blue      health plans (39 BCBS   likely Cross/Blue Shield       plans) and plans (75), HMOs        Anthem/Wellpoint, (614) and commercial    Aetna and Cigna insurers                account for over 30% of managed care enrollment ---------------------------------------------------------------------- Plan type market        Plan type market        In five years, we share:                  share:                  anticipate that ABHPs -- Indemnity - 62%      -- Indemnity - 2%        will be offered by -- PPO - 13%            -- PPO - 47%             80% of employers and -- HMO - 20%            -- HMO - 26%             will be the primary -- POS - 5%             -- POS - 15%             medical option for -- ABHP - N/A           -- ABHP - 10%            50% of that group ---------------------------------------------------------------------- PBMs were a nascent     Three PBMs              The PBM business model industry               -- Medco, Express        will continue its Scripts and             trend toward CVSCaremark -- have     transparence, and 37% market share and    market leaders will enroll over 200         accelerate their million individuals     integration with medical benefits ---------------------------------------------------------------------- $40.3 billion spent on  More than $188.5        U.S. prescription drug prescription drugs      billion spent on        spending is projected prescription drugs      to increase to $446.2 billion in 2015, a 138% increase in 11 years ---------------------------------------------------------------------- Average price of a      Average price of a      Employers will prescription: $22.00    prescription: $75.00    continue to band together to form prescription drug purchasing pools to increase their purchasing power through higher volume and shared expertise ---------------------------------------------------------------------- 12% of adult            26% of adult            If obesity trends from population is obese     population is obese     the 1970s to 2004 continue, 51% of the U.S. adult population will be obese in the next 20 years ---------------------------------------------------------------------- In 1995, 118 million    In 2010, 141 million    In 2025, 164 million Americans had a         Americans will have a   Americans are chronic condition       chronic condition       projected to have at least one chronic condition ---------------------------------------------------------------------- 

About the Survey

The Towers Perrin 2009 Health Care Cost Survey was conducted during August and September 2008. Participants were asked to report their 2009 per capita premium costs for insured health and dental plans, and premium equivalents (i.e., estimated benefit and administrative costs) for self-insured plans. Survey respondents represent primarily Fortune 1000 companies with operations in numerous locations nationwide. Health programs sponsored by the 321 participating companies cover 6.6 million U.S. employees, retirees and dependents, and cost $32 billion annually.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information about Towers Perrin is available at http://www.towersperrin.com/hrservices.

EDITOR’S NOTE: David Guilmette, Ron Fontanetta, Al Gubitosi, Mark Olson, Martha Terry and other Towers Perrin consultants are available for interviews on this topic. Please contact Joe Conway (914-745-4175) or Jason Schlossberg (646-747-7140) to arrange for an interview. The Towers Perrin 2009 Health Care Cost Databook, a special report accompanying the survey that looks at key health care trends over the past 20 years, is also available.

(1) Towers Perrin divides respondents in its annual health care cost database into three categories: low-performing, average-performing and high-performing companies. Performance designations are based on relative costs and cost increases, as well as whether an organization is meeting its health benefit objectives in certain key areas such as managing employer and employee costs, enhancing efficient purchasing of health care services, enhancing employee understanding and engagement, enhancing employee satisfaction, attraction and retention.