America, This Is Really Gonna Hurt
If Tom Lerche or anyone else in his family falls seriously ill this year, he'll be paying a lot more of the bill. Under a new medical plan, his employer, Aon Consulting Corp., is providing up to $2,500 for routine doctor visits and medicine. But after that, he has to pay every dollar until company coverage kicks in again at $5,000. The company "is trying to get employees to behave as if they're spending their own money," says Lerche, a senior vice-president. People who reach into their own wallets, he says, "may be more cautious and conservative. They're more likely to consider a generic drug or ask a provider more about fees."
Or reach for the Prozac. After years of staying fairly flat, medical bills are climbing sharply again for Corporate America--and hard-pressed companies increasingly are passing more of the tab to their workers. Having already hiked insurance premiums a steep 11% this year, insurers are asking companies for increases of 18% or more in bargaining now under way to set charges for 2002 medical plans. While analysts expect that the final increase for companies will likely be closer to 13% to 16%, there's little doubt big annual price hikes are again becoming the norm. "We haven't seen these kind of increases since the early 1990s," says Kenneth Sperling, health-care practice leader for Hewitt Associates, an employee-benefits consulting firm. "Employers are struggling."
MAJOR SHIFT. Indeed, many are searching for new ways to contain those fees. They may have little choice. The weak economy has already left most employers wrestling with plummeting profits and desperate to hack costs. Few can swallow a big increase in health-care costs now. And the impact of increased costs could go well beyond the direct hit to individual pocketbooks and corporate budgets. "This is going to become a brake on economic growth and a major contributor to inflation," warns Sung Won Sohn, chief economist at Wells Fargo Bank.
It all makes for a big shift from recent years. Employers who had gotten used to absorbing modest bumps in annual claims and premium costs are seeing increases across the board. The cost of popular point-of-service managed-care plans, which give employees a broad choice of doctors, jumped 14.1% between July, 2000, and July, 2001, reports Segal Co., a New York-based benefits consultant. Claims for health-maintenance organizations jumped 11.2%, while more traditional fee-for-service claims rose 11.9%. "The prospects are quite ominous," says J.George Mikelsons, chairman of American Trans Air, an 8,500-employee Indianapolis-based regional airline. "We'd be tickled pink if we could hold the increase to the high single-digit level."
Why the uptick now? For one, the big gains in fighting medical cost hikes are largely history for employers. In the early 1990s, they switched many staffers over from traditional fee-for-service indemnity plans to managed care and enjoyed big savings. But now, with all but perhaps 10% to 15% of employees covered by such plans, the one-time gains are behind them. "It was a fantasy to believe that managed care would solve the health-care cost problem," says Drew E. Altman, president of the Henry J. Kaiser Family Foundation, a medical think tank. "Health-care costs will continue to rise."
Moreover, experts blame a clutch of specific culprits. Aging baby boomers use more health-care services, whether they're going to the doctor more often or snapping up pricier new drugs, from Viagra to Vioxx. Drug spending alone, driven by the development of new medicines and evermore aggressive marketing, may rise 16% next year.
What's more, health-maintenance organizations have been stung by the political backlash against their most restrictive cost-containment practices in recent years. As a result, they have eased up on the worst of those practices, even as doctors and hospitals have banded together to boost their bargaining power and demand higher reimbursements. But with pressure from Wall Street to improve their often meager profits, health insurers are trying to pass those increased costs along to corporate insurance buyers. That has been made easier by consolidation in the industry: With only a handful of mega-insurers left standing, corporations have fewer options to choose from. Says Hewitt's Sperling: "With today's market, there's nowhere to go."
Except, that is, to share the burden with employees. A Sept. 6 study of some 2,734 employers by the Kaiser Family Foundation found that 75% of big companies and 42% of smaller ones are likely to raise premiums for their employees in the next year. Already, the average deductible for some preferred-provider organizations has risen nearly 13%, to $407, this year and copayments for drugs on average climbed 25%, to $20. Many employers, too, are creating three tiers of drug copayments--they charge the least for generics, higher amounts for branded drugs, and still more for drugs that aren't on health plans' preferred lists. "They will not just ask workers to pay more," says the Kaiser Foundation's Altman. "They will tighten up in lots of little ways."
Some aren't so little. At Chicago-based Bank One Corp., for instance, higher-paid workers this year began paying a bigger share than their co-workers. An executive vice-president now pays just over $144 every two weeks for his point-of-service coverage, while staffers making under $50,000 a year pay $82.50 every two weeks for the same coverage. Last year, they all paid the same $71.20.
Other companies are looking elsewhere to cover costs. That's the case at Microsemi Corp., a $250 million-a-year semiconductor maker based in Irvine, Calif. Last November, to cut in half the 18% price hike sought by Microsemi's insurer, staffers began paying $5 to $10 more for each covered drug prescription, and most are also now paying more medical expenses out of pretax flexible spending accounts.
Small companies have been especially hard hit. CTC Communications Group Inc., a telecommunications equipment maker in Waltham, Mass., had to stomach an 18% rise in health-insurance costs in July. So now individual employees are paying $75 a month more--a $15 uptick--while families have seen premiums rise $20, to $150. "We absorbed increases the past five years," says human resources director Sandi Crespi. "We try not to pass on [costs] to employees, but this year we did."
SELF-INSURED. For some employers, dramatic change could be in the works. More and more companies are looking into so-called defined-contribution plans, such as the one Aon executive Lerche uses. Such plans cap the amount of money a company will shell out in health insurance premiums and shift more of the responsibility for containing costs onto the employee. And some employers, such as Apache Corp., a Houston-based oil and gas exploration company, are switching to self-insurance. Under such plans, insurers simply manage the billing but the companies themselves are responsible for actual medical costs. Apache is betting that it will be able to handle higher medical bills more readily than higher premiums and fees.
Ultimately, the cost hikes are forcing some employers to rethink how much they should spend on health care, if anything at all. Just 34% of large companies surveyed in the Kaiser Foundation study now offer health-care benefits to retirees, for instance. That's down from 37% last year, 41% in 1999, and 66% in in 1988. Worse, many companies may be tempted to quit offering health-care benefits even to current employees: With such benefits easily equal to 15% of the salary of an employee, only 65% of those companies surveyed by the Kaiser Foundation now offer health-care coverage. That's off from 67% last year.
Until recently, a combination of tight labor markets, strong profits, and the relatively modest increases in health-care premiums in past years had allowed many employers to ignore such concerns. No longer. At Google Inc., the online search engine firm based in Mountain View, Calif., Chief Executive Officer and Chairman Eric E. Schmidt has been focused on the Internet meltdown, not medical bills. "I'll have to add that to the list of things for me to worry about," he says. Considering the size of the coming price hikes, Schmidt and his fellow CEOs may find that controlling health-care costs hasn't simply been added to the to-do lists. It may quickly rise to the top.
By Joseph Weber, with Michael Arndt, in Chicago, Laura Cohn in Washington, and bureau reports