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Employers Expect to Spend More on Health Care

Analysts say survey's findings may explain why some companies are dropping coverage or switching plans.

By Ronald D. White
Times Staff Writer
December 9 2002

Los Angeles-area companies expect health-care spending on their employees to jump nearly 15% next year, a survey set to be released today has found.

That would come on top of an expected 8.6% bump this year, when employers will spend an average of $5,628 per worker, according to a survey by Mercer Human Resource Consulting, an employee-benefits consulting firm. Sixty-eighty California companies were part of the survey, which polled 2,889 employers across the country.

Nationally, employers expect health-care costs to rise 14.6% in 2003, about the same as this year's 14.7% increase, the steepest in a dozen years and seven times the rate of inflation.

Los Angeles-area companies are expecting the rate of increase to double next year because they have been more aggressive in curtailing costs through higher co-pays and deductibles and more restricted formularies, according to Praveen Thadhani, a Mercer human resources consultant. Many local employers don't feel they can take as hard a line with their workers this coming year, he said.

Nationally, sharp cost increases are prompting some employers to drop health-care coverage or switch to consumer- directed health plans, the survey found. The percentage of small businesses -- those that employ fewer than 50 workers -- that offered health-care coverage fell to 62% nationally this year, from 66% in 2001, Thadhani said.

Some experts say health-care costs could rise even faster than companies are anticipating.

"When you talk to insurance brokers who have their ears closest to the ground, you hear of 20% to 40% increases for health-care costs in each of the next three years," said Peter Boland, a health-care expert in Berkeley. "Some are saying 60% for small to medium companies."

San Francisco-based Wells Fargo & Co. saw its health-care costs surge 15.4%, or $60 million, to $450 million this year, said Sally Welborn, the company's vice president of corporate benefits. Wells Fargo has 130,000 employees and 25,000 insured retirees.

"Everyone's calling it the perfect storm," Welborn said. "There's one going on with health care for current employees and another on the retirement side, and retiree costs are up even more dramatically. It's quite a weather pattern. Certainly, the company cannot withstand increases of this magnitude in the future."

Actuaries working with employers on the survey said most of this year's increase came from higher hospital charges, Thadhani said. A report by the Center for Studying Health System Change found that hospitals were responsible for more than half of the increase in health-care costs because of additional medical tests and treatments and higher hospital prices.

Prescription-drug prices rose 16.9%, compared with 17.8% in 2001 and 18.3% in 2000, the survey found.

The influence and popularity of the traditional HMO model, which 10 years ago brought health-care price inflation to a halt, continued to wane. HMO enrollment nationally fell to 29% from 33% in 2001, as enrollment in more expensive and less restrictive preferred provider plans rose to 50% from 46%, the survey found.

California remained the exception, with 62% of the employees at the companies polled in the Los Angeles area enrolled in HMOs.

Efforts begun last year to bring employees into the health-care decision-making process are off to a slow start, Thadhani said.

The idea was to give consumers effective and economical choices about medical care, from hospital stays to prescription drugs.

The theory was that consumers, once they were made more aware of expenses, would make smarter and less-expensive choices. That's the notion behind consumer-directed health plans, or CDHPs. But so far, workers have been cool to the concept.

Under a CDHP, a company contributes a set amount per employee -- from $500 to $1,000 a year -- into a health/medical care account. Workers can use those funds to purchase health care, but they are responsible for any costs above their account limit until they reach an annual deductible, usually $500 or $1,000 above the value of the health-care account. Once they exhaust that amount, employees move to a traditional health-care plan and are fully covered.

Wells Fargo is offering its employees a CDHP this year, from Minnesota-based Definity Health, Welborn said. Workers get a $1,000 personal care account and have an annual deductible of $1,500, leaving a $500 gap. Once the employee has reached the $1,500 deductible, the health-care coverage takes effect, and out-of-pocket expenses stop at $2,000.

So far, however, fewer than 2,000 Wells Fargo employees have signed up with the CDHP.

Stanford University, which has 10,000 employees and saw its health-care costs rise more than 20% this year, considered offering such a plan but decided against it. That's because Stanford did not find that the CDHP was "mature enough" in terms of available doctors and offerings, said John Cammidge, the university's director of human resources.

"Health care for the uninsured and insured is a premier challenge for the country at the moment," Cammidge added. "It can't continue in the way that it has over the last two years. It's not possible."

Every time there has been a big hike in health-care costs, "there has always been a counteraction or an intervention or the threat of one," Boland said. "Now, managed care is dead as a cost-containment vehicle."

Officials at Tenet Healthcare Corp., the Santa Barbara-based hospital operator that has been the subject of lawsuits and federal inquiries regarding its business and pricing policies, say it's too easy to make hospitals the major culprits of rising costs.

"Managed care was doing what it was supposed to do. Consumers and providers revolted," Tenet spokesman Harry Anderson said. "It's not just that hospital costs are rising. They are rising in the aggregate because > there is more hospital care being provided."

Stanford Professor Alain Enthoven, widely considered the father of the managed-care system, said blame for the current situation is shared by many, including employers and consumers.

Enthoven said consumers are guilty of "a pervasive environment of cost-unconscious demand" for more sophisticated and expensive medical care without having any willingness to help foot the bill.

Meanwhile, managed-care companies have abandoned their gatekeeper role and no longer are taking steps to rein in unnecessary care, Enthoven said. Doctors and hospitals, he pointed out, are sometimes rewarded for ineffective treatment and medical errors when they are paid again for the further treatment necessary to correct mistakes and help the patient recover.

"Employers share in the blame by arguing that consumer-driven health plans are mere shells for weak programs that emphasize higher deductibles, Enthoven said, adding that employees should push for a wide range of options rather than settling for one or two choices.

Yet a broad range of choices only matters when they are very different and do not have overlapping programs and doctors, noted Peter Lee, president of the Pacific Business Group on Health, a group of 48 companies that buys > health-care coverage for about 3 million workers.

Consumer-driven health plans are important because they "engage consumers as the drivers of care," he said. "It promotes health-care consumerism, and we are starting to see health plans step up to the plate as the information sources to help enrollees make better choices."

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