August 2004

Survey: Small- and mid-sized employers
cut benefits to hold costs

The nation's small and mid-sized employers cut benefits in their health plans in 2003, holding the cost increase to 9.8 percent among employers with fewer than 2,000 workers. According to a survey report released today by Marsh Inc., which analyzes data from 1,904 such employers, the total cost of health benefits (medical, dental, and any other health plans offered) averaged $6,130 per employee in 2003.

The smallest employers generally are keeping costs down by discouraging coverage of dependents and imposing high deductibles. Among employers with fewer than 50 employees, cost averaged just $5,795 per employee. But mid-sized employers (1,000 - 1,999 employees) experienced an average cost of $6,472 — more than all larger employers ($6,324).

"The dilemma for mid-sized employers is that they must compete with the largest employers for labor, and thus must offer a comparable benefit package. Yet they often do not have the purchasing power of large employers, nor do they benefit from the same economies of scale," said Judye Fawver, vice president, Employee benefits of Marsh's office in Minneapolis.

According to the report, employers with 10 to 49 employees required employees to pay, on average, 64 percent of the PPO premium for family coverage. Just 44 percent of their employees elected family coverage.

Employers with 1,000 to 1,999 employees required a family contribution of just 30 percent and, not surprisingly, a far greater percentage of their employees elected it (57 percent).

COSTS ARE SHIFTED
Although the slowdown in benefit cost increases in 2003 was welcome, it does not signal a cooling of the underlying cost trend; rather, it was the result of employer cost-cutting measures.

For example, the percentage of employers requiring a PPO in-network deductible of $1,000 or more jumped from 22 percent to 34 percent, while the percentage requiring an HMO physician office co-pay of $20 or more nearly doubled, rising from 18 percent to 34 percent.

Fawver observed that mid-sized firms have room to go even further.

"Consumers spent less in 2003 as a percentage of total health benefit cost than they did in the 1960s," she said. "Then, employee out-of-pocket spending amounted to nearly two-fifths of the total cost of coverage; today, it amounts to just about 12 percent.”

The smallest employers have been the first to shift cost, but survey results suggest that in 2004 the larger ones will follow suit. Nearly half (46 percent) of the surveyed employers with 1,000 to 1,999 employees said they would raise employee contribution percentages in 2004, and 43 percent said they would shift more cost to employees by raising deductibles, co-payments/co-insurance or out- of-pocket maximums. These figures are both nearly double the percentage of smaller employers planning to shift more cost to employees.

Overall, the surveyed employers expect an increase of 13.9 percent in 2004. The smallest among them (those with 10 to 49 employees) expect an increase of 15.2 percent

CONSUMERISM: COST-CUTTING STRATEGY
Although healthcare will once again be a central topic of debate in the upcoming presidential elections, Fawver believes "employers must consider a future where, in the absence of meaningful state or federal reform, costs will continue to rise at double-digit rates."

While few mid-sized employers (1percent) have implemented consumer-directed health plans, the new medical benefit design that generally includes high-deductible insurance, an employee-controlled account, and healthcare decision support tools, nearly two-fifths (39 percent) indicated that promoting consumerism — defined as informed and responsible spending by employees for health-care service — is part of their current health benefit strategy.

Consumerism includes such tactics as providing information about provider cost and quality and replacing co-payments with co-insurance so that employees benefit when they use less expensive providers.

Even switching to a prescription drug design that encourages the use of generic drugs promotes consumerism by letting employees feel the financial consequences of choosing — or allowing their doctor to choose — brand-name drugs over generics, says Fawver.

Source: Marsh Inc., http://www.mmc.com/

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