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Towers Perrin Survey Shows Employer-Sponsored Health Benefit Costs Continue to Outpace the CPI -- Projected 6% Increase for 2007 Means Annual Cost Per Employee Will Approach $9,000

Posted on: Tuesday, 26 September 2006, 12:01 CDT

According to the Towers Perrin 2007 Health Care Cost Survey, health care

costs for U.S. employers are projected to rise by 6% in 2007. That

increase, fully two-thirds higher than the Consumer Price Index (CPI),

will exert significant pressure on businesses striving to maintain

adequate coverage for their employees -- and make medical coverage costs

increasingly burdensome for all U.S. employees, particularly lower-wage

workers and those who retire before becoming eligible for Medicare.

In flat-dollar terms, next year's gross health

care expenditure is expected to rise by an average of $518 per employee,

to an average total cost of $8,748. Employers are expecting to subsidize

78% of next year's premium costs, while

employees will have to cover the remaining 22%, plus usage-based copays,

deductibles and coinsurance.

While the projected growth rate of 6% for 2007 marks the fourth year of

slower increases, the cumulative effect of rising costs has produced

record highs for employer-sponsored health plans and, consequently,

employee contributions. In fact, health care costs have increased by

over 60% in just the past five years.

Survey results suggest that, with cost increases continuing well above

the CPI, the issue of affordability -- for both businesses and employees

-- could become considerably more challenging in the years ahead as Baby

Boomers age and chronic diseases (such as diabetes and obesity)

proliferate.

At the same time, however, the survey results show wide variation in

per-employee costs among similarly sized companies. This finding offers

proof that companies can succeed -- and some

are succeeding -- at effectively controlling ongoing cost increases

through a variety of benefit management initiatives.

These observations are drawn from top-line results of the annual survey,

now in its 18th year, conducted by Towers Perrin's

HR Services business. This year's survey

database currently includes detailed information on the health benefit

programs provided by nearly 170 of the nation's

largest employers, covering 3.5 million U.S. employees, retirees and

dependents.

"Our analysis of next year's

employer-sponsored health care costs is a good news, bad news scenario,"

said Dave Guilmette, Managing Director of the Towers Perrin Health and

Welfare practice. "While it is good news that

2007 represents the fourth year of declines in the overall average rate

of increase, it is definitely not a signal that the pressures are

abating or that companies can sit back and expect increases to continue

their downward trend."

"The protracted rise in health care costs --

whether by single or double digits-- is eating

into company profit margins and employee wage increases, and taking

significant dollars away from other benefit and reward programs,"

added Ron Fontanetta, a Principal in the firm's

Health and Welfare practice. "In fact,

because most employers can't pass costs to

customers in the form of higher prices, we estimate that, in every year

for the last five years, about 1% of wage increases has gone to health

care costs. It is a phenomenon we call 'the

hidden paycheck' because companies have

essentially been substituting health benefit dollars for salary and

merit increases."

A Look at the Numbers: 2007 Average Active Employee and Retiree

Medical Costs

Looking at the 2007 costs by coverage level, the average reported 2007

cost of medical coverage for active-employee-only coverage is $366 per

month ($4,392 annually), $749 per month ($8,988 annually) for

employee-plus-one-dependent coverage and $1,079 per month ($12,948

annually) for family coverage.

Exhibit 2

Average 2007 Monthly Health Care Costs and Cost Increases by

Covered Group*

Employee/Retiree Only

Employee/Retiree Plus Spouse

Family

AverageIncrease From2006

Active employees

$366 

$749 

$1,079 

6.3%

Retirees under age 65

$589 

$1,152 

$1,482 

7.2%

Medicare-eligible retirees

$269 

$537 

N/A 

7.3%

*Data show average rates across all plan types (PPO, HMO, POS,

etc.)

The total cost for retirees under age 65 is the highest in the Towers

Perrin survey -- $589 per month for retiree-only coverage ($7,068

annually), and more for coverage that includes dependents.

As in years past, survey results show that employers continue to

shoulder most of the burden. Of the total premium increase of $518,

employers will see an annual increase of $374 per employee, and

employees on average will pay $144 more in 2007.

Looking Beyond the Averages: Huge Cost Differentials Among U.S.

Companies

This year's average cost increase would have

been closer to 8.5% were it not for employer efforts to aggressively

manage program performance. In fact, the survey data clearly show that a

number of companies have succeeded in slowing the upward cost spiral in

their own programs and stemming the double-digit cost growth that

characterized the late 90s and early 2000s. Notably, however, 19% of the

survey respondents -- or nearly one in five -- are still experiencing

increases of 11% or more.

To better understand the factors that contribute to cost variation, the

Towers Perrin analysis divides the survey group into three categories --

low-cost companies (companies in the lower third, with the lowest

premium level per employee), average cost (the middle third) and

high-cost companies (the upper third, experiencing the highest cost per

employee).

Summarized in Exhibit 3, the spread between high and low costs

can have significant implications. For example, this year's

survey shows that the per-employee cost variation between similar

companies is about $3,000 for 2007 and this cost difference is likely to

grow in the future. If two companies with 10,000 employees are at

opposite ends of the cost spectrum, one will pay $30 million a year more

in health care costs than the other, which could significantly impact

competitive positioning and profits -- or be transferred to employees

through reduced raises and merit pay.

Exhibit 3

Cost Variation Across Companies: Top Third vs. Bottom Third

High-Cost Companies

Low-Cost Companies

Cost per employee per year

$10,428 

$7,224 

Increase in employer cost

8%

4%

Increase in employee cost

10%

6%

"The significant variation in health care

costs among companies that are otherwise quite similar not only

highlights the need for active management of benefit programs, but also

quantifies the tremendous toll that an inefficient health benefit

program can take on a business's

profitability and its competitiveness," noted

Guilmette.

"There's no doubt

that employers continue to have to row upstream,"

he added. "And while the current may not be

as strong now as it was a few years ago, it will still push companies

back if they don't keep pushing hard enough

against it. As evidenced by their commitment to active management

strategies, what's notable about the low-cost

companies is that they never let themselves drift with the flow, and

that push-back is translating into millions in savings."

Contrary to popular belief, low-cost companies are not simply shifting

costs to contain costs. In fact, the survey data show that employees at

low-cost companies tend to pay less than employees at high-cost

companies -- approximately $1,728 per year on average versus the $1,884

employees at high-cost companies will pay in 2007.

One other characteristic that unites all low-cost companies is their

willingness to be decisive and take action when needed. Nearly half of

low-cost companies (46%) identified themselves as either "early

adopters" or "fast

followers" in describing their organizations'

approach to health benefits, while over two-thirds (69%) of high-cost

companies identified themselves as "middle of

the pack" or "wait

and see."

Looking more closely at what distinguishes the high and low groups, the

survey identifies a number of specific steps that low-cost companies are

taking to actively manage their health programs. These steps suggest a

significant strategic shift among leading employers that are moving away

from individual cost-containment "fixes"

toward a holistic approach that aims to create a "culture

of health" for the organization, encompassing

both employer and employee actions and accountabilities for responsible

health management.

In brief, the low-cost companies define "consumerism"

in broad terms that extend far beyond benefit plan design. For example,

our data show that nearly two-thirds (63%) of the low-cost companies

either have implemented a consumer-driven health plan (CDHP) or will

implement one in 2007 versus 38% of the high-cost companies. But this

contrast between the two groups is just one of many that touch on every

aspect of the health program, from vendor management to consumer

engagement strategies.

What Successful Companies Do Differently

Companies with lower costs show a deep commitment to managing their programs in ways that benefit both the company and employees. Specifically, these companies:

-- Have a clear focus and a strategic framework for their benefit

program -- Identify problems and opportunities by understanding the current

state of their benefit program and the health care system overall -- Pursue more extensive solutions, including those that address the

underlying causes of health care cost increases.

Following are selected examples. (See also the exhibits accompanying this press release.)

-- Focus and framework -- Over half of the low-cost companies have

written objectives for health care benefits (versus just over a

third of high-cost companies) and set measurable targets. For

example, low-cost companies are twice as likely as high-cost

companies to set expense targets for their cost-sharing provisions. -- Understanding the current state -- The vast majority of low-cost

companies (79%) extensively measure program costs versus less than

half (48%) of the high-cost group, and are twice as likely to use

extensive health care utilization metrics than their high-cost

counterparts. Low-cost companies are also more likely to do at

least some measurement of health status/risks across the population

(76% versus 47%). -- Extensive solutions targeting underlying causes -- Low-cost

companies design their programs to make the true costs of care

visible to employees, and hold them accountable for the decisions

they make at the point of care. Example: There is a significant

trend away from copays to coinsurance among low-cost companies (68%

versus 33%).

Low-cost companies invest in health by providing programs and

resources that encourage employees to understand and manage their

health risks and conditions. Example: Low-cost companies offer a

variety of health management programs such as those focused on

health improvement (83% versus 58%) and disease management (84%

versus 61%).

Low-cost companies require employees to be more accountable for

their decisions, and also take steps to help employees do that by

expanding communication initiatives and providing a variety of

tools and resources to support employee awareness, understanding

and action. Example: Low-cost companies are much more likely to

focus communication and education on defining what it means to be a

better health care consumer and how employees can benefit (73%

versus 38%).

"Most of the companies in the survey have

demonstrated commitment to ensuring their employees have coverage,"

said Guilmette. "But as the cost increases,

they are increasingly asking their employees to become more accountable

for their health care consumption and participate in cost-control

initiatives. At the same time, however, they're

also committed to providing the tools and resources employees need to

participate with their employer in controlling health care costs."

Stressing the System: The Pending Crisis in Health Care Affordability

The survey data suggest that the general trend toward greater sharing of

the financial burden between employers and employees is not losing

steam. In flat-dollar terms, the employee share in 2007 -- an average of

$72 a month ($864 annually) for employee-only coverage and $242 a month

($2,904 annually) for family coverage -- represents a significant cost

for all employees and a potentially prohibitive cost for some workers.

Clearly, employees with relatively low salaries are particularly

vulnerable to the high cost of health care. As an example, for an

individual working 40 hours per week at minimum wage, next year's

average total health care premium (including both employer and employee

share) will represent 80% of that individual's

total annual earnings.

Retirees, meanwhile, will contribute well over half (56%) of the total

cost of their coverage, with retirees age 65 and over paying an average

of $119 a month ($1,428 annually) for retiree-only coverage. Retirees

under 65 will be hardest hit by cost increases in 2007, and will pay an

average of $298 a month ($3,576 annually) for retiree-only coverage.

While many companies are taking steps to help their employees manage the

growing costs, the fact remains that year-after-year employee

contribution increases are taking their toll on employees. As a result,

employers are becoming increasingly concerned about growing numbers of

active employees who are opting out of coverage entirely.

"At present, low-wage workers and retirees

under age 65 are the ones being hardest hit by the cost increases. But

the mere fact that working people are getting priced out of the health

care system entirely is a trend with tremendous import for the nation as

a whole and one that must be addressed by public and private sectors

alike," said Guilmette. "Contrary

to conventional wisdom, having uninsured employees is not a good thing

for employers, and can lead to significant losses in productivity.

"In light of this trend, it is heartening to

see that the proactive steps forward-thinking companies are taking to

manage costs are truly having an impact. Even more promising is how

these companies are achieving this goal,"

said Guilmette. "While they're

certainly requiring their employees to be more accountable in the health

care decision and consumption process, they're

also, significantly, encouraging their employees to be more committed to

achieving or maintaining their own health. These companies are doing

more than just facilitating a culture of responsibility--they're

supporting the creation of a culture of health."

About the Survey

The Towers Perrin 2007 Health Care Cost Survey was conducted

during August 2006 and September 2006. Participants were asked to report

their 2007 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

benefits for the 167 participating companies cost more than $15 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. Through its HR Services business, Towers

Perrin provides global human resource consulting and administration

services that help organizations effectively manage their investment in

people. Areas of focus include employee benefits, compensation,

communication, change management, employee research and the delivery of

HR services. The firm's other businesses are

Reinsurance, which provides reinsurance intermediary services, and

Tillinghast, which provides management and actuarial consulting to the

financial services industry. Together these businesses have offices and

business 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, Mark Olson 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.

Source: Business Wire

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