LINCOLNSHIRE, Ill. – After enjoying a steady decline in health care cost trends over the past eight years, U.S. companies have seen average rate increases settle in around 6 percent to 7 percent, according to Hewitt Associates, a global human resources consulting and outsourcing company. In 2008, average health care costs increased 6.0 percent, up from 5.3 percent in 2007. Hewitt is projecting a 6.4 percent average increase for employers in 2009.

According to Hewitt, the average health cost per person for major companies will increase from $8,331 in 2008 to $8,863 in 2009. The amount employees are being asked to contribute toward this cost will be $1,946, representing approximately 22 percent of the overall health care premium and up from $1,806 in 2008. Average employee out-of-pocket costs, such as copayments, coinsurance and deductibles, are also expected to increase from $1,707 in 2008 to $1,880 in 2009. Overall, employees' total health care costs—including employee contribution and out-of-pocket costs—are projected to be $3,826 in 2009, up 8.9 percent from $3,513 in 2008.

"Employers continue to diligently manage health care costs through a combination of approaches, including continued cost shifting, tougher negotiations with health plans, and expanded health and wellness programs with incentives to encourage behavior change, which is why we're seeing rate increases level out a bit," said Jim Winkler, North American practice leader of Hewitt's Health Management Consulting business. "The challenge now will be sustaining or even lowering those rate increases in an environment where the legislative, economic and political landscape is rapidly changing, and where companies are under more pressure than ever to balance their needs with the needs of employees and their families. Over the next few years, they will need to take a more rigorous and aggressive approach to getting employees healthy—which means implementing a combination of programs that drive actual behavior change, eliminate barriers to health and encourage people to take more responsibility for their personal health. These are the steps that will ultimately make an impact in lowering overall benefit costs and putting more money in the wallets of employees."

2008 Cost Increases by Major Metropolitan Area

While Hewitt's data shows relatively flat overall cost increases in 2008, a few major U.S. markets experienced rate increases significantly higher than the average: Cincinnati, OH (11.1 percent), Columbus, OH (9.9 percent), Orlando, FL (9.2 percent) and Minneapolis, MN (9.1 percent). Conversely, Austin, TX (1.0 percent), Houston, TX (2.6 percent) and Chicago, IL (3.7 percent) experienced lower-than-average rate increases in 2008.

2008 Cost Increases by Plan Type

In 2008, Hewitt saw average cost increases of 10.1 percent for traditional indemnity plans, 8.0 percent for health maintenance organizations (HMOs), 3.9 percent for point-of-service (POS) plans and 4.8 percent for preferred provider organizations (PPOs).

For 2009, Hewitt forecasts that companies will receive cost increases of 6.5 percent for traditional indemnity plans, 8.0 percent for HMOs, 5.5 percent for POS plans, and 5.5 percent for PPOs. That means from 2008 to 2009, the average cost per person for major companies will increase from $9,296 to $9,900 for traditional indemnity plans; $8,442 to $9,117 for HMOs; $8,986 to $9,480 for POS plans; and $8,048 to $8,491 for PPOs.

"Over the past few years, HMO rates have averaged almost two times higher than the rate increases of PPO or POS plans, mainly due to the fact that local and regional fully insured HMO plan offerings have higher administrative costs and are subject to state-mandated benefit requirements that drive up premium costs," said Bob Tate, chief health care actuary at Hewitt. "We expect to see this trend continue, particularly because premiums translate directly into profit and loss for fully insured HMOs, and higher rate increases for these plans ensure higher profit margins."

Employer Response to Rate Increases

To keep rate increases in the 6 percent to 7 percent range, employers continue to take proactive steps to mitigate costs and implement initiatives focused on improving employee health and productivity. These steps include:

Increasing attention on plan dependents. While cost-shifting in its traditional sense has tapered, an increasing number of companies are beginning to look at cost shifting a portion of their dependent subsidy dollars to employees, either through increased payroll contributions for dependent health care coverage or by applying surcharges to encourage dependent spouses to take coverage under their own employer's plans.

In addition, employers are becoming increasingly interested in conducting dependent audits, which are designed to assess and remove plan costs for dependents who don't qualify for coverage based on the employer's eligibility requirements. More than 40 percent of Hewitt's clients have conducted a dependent audit in the past five years, and another 10 percent planned to conduct one in 2008.

Eliminating "cost-inefficient" plans. As fully insured HMO rates increase in excess of overall medical cost increases, an increasing number of companies are consolidating plan participants under self-insured arrangements with fewer health plans. This enables them to streamline administration, offer more consistent designs across their markets and reduce costs—all of which help them avoid additional cost shifting to employees, either in the form of reduced benefits or higher payroll increases.

Aggressively managing health plans. As in past years, employers continue to negotiate aggressively with their health plans to try to reduce initial premium increases, and they are coming to the negotiations table with clear expectations and requests.

In addition to negotiating costs, an increasing number of employers are holding health plans accountable for delivering on specific measures in their health and productivity programs, including participation levels, clinical outcomes, reductions in claim costs and member satisfaction levels. Hewitt research shows that almost 60 percent of companies planned to ask their vendors for quarterly reports on their contribution to their health and productivity strategy within the next five years.

Continuing emphasis on employee health and productivity. Companies are continuing to invest significant resources in programs aimed at improving health and productivity of employees and their families. Flu shots, smoking cessation, physical fitness and weight management programs, as well as health risk questionnaires and online tools, are currently the most popular programs offered by employers. On-site health services, biometric screening and health/clinical advocacy programs—while still emerging trends—are also gaining increased attention, as companies look for more effective ways to motivate consistent and long-term employee behavior change.

To encourage participation in these programs, Hewitt's research shows just under two-thirds (63 percent) of companies provide or plan to provide employees with financial incentives, most likely in the form of credits or lower premiums. While most companies work on the "honor system," expecting employees to participate in a program once they enroll, a smaller minority are beginning to require completion of a program as a prerequisite for obtaining the incentive.

On the opposite end, almost 17 percent of companies in 2008 charged or planned to charge higher contributions for employees engaging in certain health behaviors, such as smoking. Another 40 percent said they were considering this option for a future date. In addition, 5 percent of companies in 2008 planned to require employees to take health assessments and/or participate in health improvement programs in order to receive health benefits, and more than half of companies said they are considering doing so at a future date.

"Over the past two years, we've seen health and productivity programs become fairly well established in large organizations, and now we're seeing increased efforts on the part of the employer—through both carrot and stick approaches—to ensure employees are actually getting value from the programs that are offered," said Winkler. "The next step will be for companies to determine whether these programs are providing a return on investment. Most currently measure the effectiveness of their programs by looking at changes in overall costs from year to year, or by the levels of employee participation in these programs. While these measures provide some short-term insight, companies that measure performance in actual outcomes will be in the best position to determine whether their programs have made an impact on truly improving employee health and productivity."

Digging deeper into chronic health conditions. According to Hewitt research, more than half (51 percent) of employees or their dependents have a chronic health condition that requires ongoing care. Most companies (93 percent) have already identified the chronic health conditions that are most pressing for their employee populations and plan to target these conditions over the next three to five years, with particular emphasis on tackling diabetes. Half (50 percent) currently offer employees enhanced medical and/or prescription drug benefits for at least one or more chronic condition, and almost a quarter (23 percent) provide incentives for at-risk individuals who participate in condition management programs and comply with recommended therapies.

Companies also continue to show an interest in value-based design (VBD) programs, which reduce or remove financial barriers for health care services proven to be effective to treat certain conditions, while potentially increasing cost-sharing for those services that have not been proven to be as effective. Hewitt's research shows that while just a small percentage of companies use value-based design programs today (12 percent), more than half (52 percent) said they were considering them in the next three to five years. Of those that currently offer value-based plan designs, 16 percent planned to expand the program beyond prescription drugs to include preventive care services or medical care services for certain chronic illnesses in 2009, and another two-thirds planned to do so in the next three to five years.

About Hewitt's Data

Hewitt's health care cost data is derived from the Hewitt Health Value Initiative, a cost and performance analysis database of more than 1,800 health plans throughout the U.S., including 400 major employers and more than 13 million health plan participants.

About Hewitt Associates

For more than 65 years, Hewitt Associates (NYSE: HEW) has provided clients with best-in-class human resources consulting and outsourcing services. Hewitt consults with more than 3,000 large and mid-size companies around the globe to develop and implement HR business strategies covering retirement, financial and health management; compensation and total rewards; and performance, talent and change management. As a market leader in benefits administration, Hewitt delivers health care and retirement programs to millions of participants and retirees, on behalf of more than 300 organizations worldwide. In addition, more than 30 clients rely on Hewitt to provide a broader range of human resources business process outsourcing services to nearly a million client employees. Located in 33 countries, Hewitt employs approximately 23,000 associates. For more information, please visit www.hewitt.com.

Maurissa Kanter

,  Hewitt Associates,  (847) 883-1000

MacKenzie Lucas

,  Hewitt Associates,  (847) 883-1000