Economic stand-out: Rising health care costs prime business concerns

By: Tom Anderson
Employee Benefits News - June 1, 2005

Health insurance price hikes have crowded out other benefit issues as the top human resource concern for employers. But as the cost of employer-provided coverage continues to rise, health care may be the top business concern for employers, period.

Just take a look at one of America's corporate titans, General Motors. The largest U.S. automaker is also the largest private purchaser of health care in the nation, spending more on health care than it does on steel. When it posted a $1.1 billion million loss in the first quarter of 2005, executives blamed rising health care costs for part of their financial woes. The company expects to spend $5.6 billion on health benefits this year, about $400 million more than it spent in 2004.

To turn around the automaker's poor performance, CEO Rick Wagoner says the company should reduce its cost structure and GM's "greatest need is to address the challenging health-care cost situation."

In the meantime, GM refused to give earnings guidance for the rest of the year, citing "the uncertainty affecting key elements of our financial forecast, such as resolution of the health-care cost crisis."

While some of GM's heath care problems are unique to the auto industry, such as an older unionized workforce with massive benefit obligations to retirees, nearly all employers grappled with health costs as their top benefits concern.

The "leather sofa"

Fifty-seven percent of business executives rate medical cost hikes as their top concern, trumping other concerns like economic uncertainty, employee retention and the need to increase productivity, finds a survey by the Society for Human Resource Management. The survey asked 587 executives, in and out of the HR department, to list their top concerns this year.

Large employers are trying to attack the root cause of rising medical costs with consumer-driven strategies, disease management, wellness programs, and a focus on cost transparency and quality data, according to another survey by Hewitt Associates.

Companies "are moving beyond more common methods for controlling costs to create more sustained and systematic changes," says Jack Bruner, Hewitt's health care practice leader. For example, Hewitt finds 7% of employers are shifting primary responsibility for health strategy from the HR department to finance and purchasing executives.

On average, companies anticipate a health-care cost increase of 12% this year, but say they can only afford an 8% bump, Hewitt's survey of more than 500 major employers indicates.

Bill Coleman, senior vice president of compensation at Salary.com, likens the process of benefits decision-making to decorating a living room. In that analogy, "health insurance is the leather sofa that employers must decide what to do with first before placing the other pieces of benefits and compensation," he says.

Health insurance cost increases eat into an employer's pool for bonuses and raises, Coleman notes, but it is difficult to tell if those costs have affected employers' ability to attract and retain talent.

Wages and benefits have been "pretty stagnant" in a period of rising health care costs, observes Elise Gould, health economist at the Economic Policy Institute, a liberal think tank. Gould is studying data from the Employment Cost Index, published by the Bureau of Labor Statistics, to determine if health care costs pose a competitive disadvantage for U.S. companies.

The Employment Cost Index shows that increases in health benefits have outpaced the hikes in total benefit costs, and that benefit costs have grown more than twice as fast as wages over the last two years.

Growing burden

For many employers, there has not been much growth in spending on new benefits, notes Jay Coldwell, executive director of product development for Wausau Benefits. Coldwell says the cost of health care has put the focus entirely on voluntary benefits if employers want to expand their offerings.

Coldwell hopes consumer-directed health care will have a moderating impact on costs as more employers and employees demand the quality health care and price transparency. But he adds that the demographics of an aging workforce probably mean "we have only seen the beginning of health cost increases."

While employers have shifted more health insurance costs to workers, the percentage of premiums paid by workers is statistically unchanged over the past several years. On average, employees pay for 16% for single coverage and 28% for family coverage, according to the Kaiser Family Foundation's 2004 employer benefits survey.

The double-digit increases mean there is less money for other benefits, observes Bill Stanton, a managing director at benefits brokerage Palmer & Cay, which was purchased by Wachovia Insurance Services in April.

"I don't see the health-care trends abating soon," Stanton notes. Work-site and voluntary benefits that leverage the buying power of the employer at no additional cost will continue to be the most popular add-ons in this environment, he says.

Many benefit surveys have predicted that health care trends are moderating, but even if they drop below the double-digit increases of the past five years, it is still growth on top of huge hikes, observes Paul Fronstin, a senior research associate with the Employee Benefit Research Institute.

"There will be no real savings by employers until you change the way high-cost users use the health care system," Fronstin says. Some aspects of consumer-driven health care may bring about that change, he notes, but it's still unclear if consumerism will have a lasting impact or only bring about one-time savings, like managed care did in the 1990s.

Regardless of consumer-driven health care, it seems that more workers would give up broad access to physicians and hospitals to save on health care costs, according to the Center for Health System Research.

The proportion of working-age Americans with employer health coverage willing to sacrifice choice of providers for lower out-of-pocket costs jumped from 55% to 59% & between 2001 and 2003, after remaining stable since 1997.

That's a significant change, says center spokesperson Alwyn Cassil, particularly since results reflect the sentiments of more than 20,000 people. Low-income consumers and those with chronic conditions were most willing to limit provider choice in exchange for lower costs.

"A likely explanation for the change in consumer attitudes is that the growing burden of out-of-pocket medical costs is prompting a reassessment of the choice-cost trade-off," says Paul Ginsburg, the center's president. - T.A.

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