Over the past year, medical costs have been an extraordinary challenge for employers. As the full effects of both the recession and the extensive changes in federal health funding and regulation continue to play out, here are the key health insurance issues employers can expect to face in the coming year.

U.S. employers can expect medical costs to increase by 9 percent in 2011, a 0.5 percent decrease from the 2010 growth rate, according to a new report from PriceWaterhouseCoopers LLP (PwC) Health Research Institute.

The latest annual Behind the Numbers report, published this week (free registration required), shows that, for the first time, the majority of the American workforce is expected to have a health insurance deductible of $400 or more, as more employers return to “indemnity style” cost-sharing by raising out-of-pocket limits, replacing co-pays with co-insurance and adding high-deductible health plans

“For more than 50 years, U.S. employers have used health benefits as a critical part of their compensation package to recruit and retain workers,” Michael Thompson, a principal of Human Resource Services at PwC, said in a statement. “The value of these benefits is becoming an even more visible part of overall compensation as medical costs grow, and, by 2014, health insurance benefits will shift from being a voluntary benefit to an individual mandate, enforced by new tax levies.”

The report includes findings from PwC’s monthly Health and Well-Being Touchstone survey of more than 700 employers from 30 industries, as well as insights gleaned from interviews with health-plan actuaries and other executives whose companies provide health insurance for 47 million American workers and their families.

The 9 percent increase in medical expenses employers face next year represents a 0.5 percent slowdown in the growth rate, but “the small decrease hides a more complicated set of forces,” according to the report.

The primary “inflators” of the medical trend in 2011 will be hospital and physician costs, which make up 81 percent of premium costs. Hospitals shifting expenses from Medicare to private payers and employers is seen as the No. 1 reason for higher medical costs, while provider consolidation is increasing, which is expected to boost their bargaining power; and hospitals plan to invest billions of dollars in certified electronic health record systems.

As costs continue to rise next year, employers will try to offset them through certain changes.

“Employers continue to seek ways to trim their healthcare costs while still being competitive in the market with a fair health benefit offering,” Jim Greenwood, chief executive of health-care service provider Concentra, Inc., said in the latest issue of View, PwC’s business magazine. “Instead of eliminating benefits, more employers are implementing comprehensive health programs that positively impact the health of the workforce and reduce healthcare costs for the company and the individual.”

Improving wellness programs and increased cost-sharing top the list of changes that employers intend to make to their benefit plans next year.

“Companies are now working with their health plan providers for new post-recession, post-health reform strategies to sustain their programs and promote health and well-being as their next competitive advantage,” Thompson said.

According to PwC’s Touchstone research, which was completed in the first quarter of 2010:

• Two-thirds (67 percent) of companies intend to expand or improve wellness programs;
• 42 percent plan to increase employee contributions for health insurance coverage;
• 41 percent expect to increase medical cost-sharing (including higher deductibles and co-pays);
• 26 percent intend to increase prescription drug cost-sharing; and
• Only 22 percent of employers with more than 5,000 employees subsidize post-65 retiree medical coverage.

In addition, the new Behind the Numbers report outlines three key “deflators” that will help employers hold down medical costs in 2011:

1. Employers are moving toward pre-managed care benefit systems by increasing deductibles and replacing co-pays with co-insurance.
2. Drug costs are being tempered by generics, as insurers are benefiting from the growing use of generic drugs.
3. COBRA insurance costs are expected to return to more normal levels in 2011.

The report’s authors said forecasting 2011 costs was “especially challenging,” as the past year has brought major changes not only to the health care industry, but to the overall economy.

“Health reform delivers only a minor impact on the underlying medical cost trends in 2011 and introduces hundreds of changes in the healthcare system designed to reduce costs and improve efficiencies in the long-term,” according to Kelly A. Barnes, U.S. health industries leader at PwC. “These changes could bring significant new cost savings opportunities for employers and payers as well as new choices and transparency for workers buying insurance.”

Related

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Benefits à la Carte

Companies Cutting Back on Health Benefits

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Resources

Behind the Numbers: Medical Cost Trends for 2010
PriceWaterhouseCoopers LLP’s Health Research Institute, June 14, 2010

Employer Healthcare Costs Expected to Rise 9% in 2011…
PriceWaterhouseCoopers LLP’s Health Research Institute, June 14, 2010

2010 Health and Well-Being Touchstone
PriceWaterhouseCoopers LLP, June 2010

Focuing on Healthcare Value
by Michael Thompson, Benjamin Isgur and Serena Foong
View, Issue 12 (2010)