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Health Benefit Costs Rise in 1997 (1998)

The 12th annual Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans found that growth in total health plan costs for active and retired workers of private- and public-sector employers with 10 or more employees was held to 0.2 percent in 1997 due to an unexpected increase in managed care enrollment. Total benefit costs for active and retired workers averaged $3,924 per employee in 1997, compared with $3,915 in 1996. Average costs for large employers (with 500 or more workers) averaged $4,369, up 0.9 percent, while smaller employers (with 10-499 workers) experienced average costs of $3,357, a decrease of 0.7 percent. Average costs varied significantly by region.

Enrollment in traditional indemnity plans dropped from 23 percent of all active employees covered to only 15 percent. Much of this shift occurred among the nation’s largest employers. "The enrollment shift masks the cost increases experienced by employers whose plans remained the same in both years," says John Erb, the study’s author. Employers who maintained the same indemnity plan, PPO, or POS plan in 1996 and 1997 experienced average increases of about 4 percent. Only employers offering an HMO in both years reported nearly flat costs. Other factors helped to moderate costs, including low inflation in the cost of medical goods and services, and fierce competition for market share among managed care organizations.

The survey shows that more than two-thirds (67 percent) of employers expect higher health benefit costs in 1998, and are budgeting for an average increase of 7 percent. "HMOs and managed care organizations paid dearly for competitive pricing in 1997," says Erb. He believes that many managed care organizations will hike prices in 1998.

Other survey results throw into question the managed care industry’s ability to control costs over the long-term, despite their recent successes. Over the past five years, enrollment growth in the classic, closed-panel HMO model — which holds the greatest promise for sustained cost control — has not been nearly as great as growth in PPO and POS plans, where traditional indemnity coverage is retained and fee-for-service reimbursement is the rule.

The survey also found that employers have begun to change mental health care plan provisions in response to the 1996 Mental Health Parity Act which, beginning in 1998, will prohibit employers from having lower annual and lifetime dollar limits for treatment of mental illness than for other disorders covered under the health plan.

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