LINCOLNSHIRE, Ill. — An analysis from Hewitt Associates, a global human resources services company, indicates that initial HMO premium rates (1) will increase by approximately 14.1 percent in 2008 — the highest rate increase in four years.

As U.S. companies begin to negotiate HMO plan rates for 2008, data from Hewitt Health Resource™ (HHR) — a Web site that captures HMO rate information for nearly 160 large companies representing more than 1 million employees and annual premiums of nearly $3 billion — shows that initial 2008 HMO rate increases are averaging 14.1 percent, compared with 11.7 percent in 2007 and 12.4 percent for 2006.  After plan changes, negotiations and terminations, final average HMO rates increased by 8.2 percent in 2007.

"While the majority of HMOs are proposing initial rate increases that are consistent with those provided in previous years, a few carriers have proposed significantly higher rate increases for 2008, which seems to be the primary reason for the spike in this year's overall rate increase across plans," said Jeff Smith, a senior consultant and co-leader of Hewitt's HMO rate analysis project.  "We expect that average rates will decrease once negotiations are complete; however, they may continue to be in the double digits."

Midwest and Southeast Regions to See Highest Rate Increases

While the U.S. will see an overall increase in rates, two regions of the country — the Southeast and Midwest — will experience significantly higher than average rates next year. Preliminary analysis shows an 18.2 percent increase for the Southeast in 2008 compared with 11.0 percent at this time last year, and an 18.4 percent increase for the Midwest, compared with 11.5 percent last year.  (See charts for more regional information.)

"We always expect to see variances in rate increases across regions, due to differences in demographics, provider costs, and common plan designs and coverage, as well as rates for health plans that target these areas," said Maureen Fay, senior consultant and co-leader of Hewitt's HMO rate analysis project.  "As plans finalize their rates through the summer and fall, we will learn more about the specific cost drivers for these regions."

Employer Response to Rate Increases

Employers are considering a number of strategies to help mitigate the impact of high HMO premium increases on their health care budgets this year, including:

Shifting Costs to Employees: Historically, employers have relied heavily on cost shifting — either through plan design or payroll contributions — to help manage health care rate increases.  In recent years, an increasing number of employers have implemented specific plan designs that encourage employees who are over-utilizing or abusing benefits to change their behaviors by increasing costs for those particular services.  For example, companies have separated out copays between primary care providers and specialists (typically, specialist copay is $15 to $20 higher) to discourage inappropriate use of specialists. 

Moving to Self-Insured Plans:  As fully insured rates increase in excess of overall medical cost increases, an increasing number of employers plan to further eliminate local HMO offerings and consolidate those plan participants under a self-insured arrangement, in which employers assume the full financial risk for medical claim costs, paying a health plan an administrative fee for services such as claims processing and provider network management.  Self-insurance reduces employer administrative costs and allows companies to pay claims based on their own experience rather than health plan book-of-business experience and trend rates.  In addition, it enables employers to offer more consistent plan designs and health care programs across their entire employee population, reducing administrative costs and simplifying communication messages to employees during annual enrollment.

Aggressively Negotiating With Health Plans:  As in past years, employers continue to negotiate aggressively with their health plans to try to reduce initial premium increases; however, this is becoming an increasingly difficult strategy for mitigating costs. 

"The continued consolidation of HMO plans has resulted in fewer employees enrolling in local HMO offerings, leaving employers with less leverage during negotiations," said Smith.  "In addition, an increasing number of healthy employees — who have historically enrolled in local HMOs — are now enrolling in consumer-driven health plans, which has affected health risk of the HMOs' employee population. To counter this concern about adverse selection, many HMOs have become conservative in their trend assumptions and less willing to bend on negotiations."

Implementing Strategies for Keeping Employees Healthy:  More companies are now looking beyond the traditional ways of mitigating health care costs and have begun to focus on improving the overall health and wellness of their employees by encouraging preventive care and developing special programs designed to address the needs of the employee population that have chronic health conditions. 

According to a recent Hewitt survey, almost two-thirds (63 percent) of employers plan to take more aggressive, multiyear steps to help employees improve their health by increasing education efforts, implementing condition management programs, and using data analysis and other cutting-edge programs to improve health and productivity while holding participants accountable for their behaviors.

In addition, employers are beginning to incorporate value-based design changes into their health care programs that remove unnecessary barriers to employees getting the care they need by providing employees with incentives to use appropriate care/services in managing their health.  According to a recent Hewitt survey, almost one in five (19 percent) companies include or plan to include, by the end of the year, benefit designs based on evidence-based medicine and appropriate care protocols, such as waiving copayments for prescription drugs that are proven to be effective and appropriate to treat certain diseases.  Another 60 percent are considering implementing them at a future date.

"Many employers feel that they have 'run out of runway' with traditional cost-shifting methodologies, as these types of strategies put barriers in place that deny employees access to essential health care," said Jim Winkler, leader of Hewitt's U.S. Health Management Consulting business.  "We're working with an increasing number of companies to develop health care programs and plan designs that drive behavior change by targeting the health and health risk needs of their diverse workforce, recognizing the distinct differences among consumers, patients and providers, and eliminating barriers to effective understanding, prevention and treatment.  While the increase in HMO rates may create immediate pressure for employers, they can manage costs more effectively over the long term by keeping employees healthy and productive at work."

About Hewitt Health Resource

Hewitt Health Resource is a Web-based service that helps companies manage all of their health plan interactions and data needs. HHR includes online capabilities for health plan selection and renewal, and Hewitt's Connections service for eligibility and premium management.  To date, Hewitt has used HHR for 160 companies representing more than 1 million participants and nearly $3 billion in premiums.  Approximately 128 health plans have also used the site.

About Hewitt Associates

With more than 65 years of experience, Hewitt Associates (NYSE: HEW) is the world's foremost provider of human resources outsourcing and consulting services.  The company consults with more than 2,300 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 340 companies to millions of employees and retirees worldwide.  Located in 35 countries, Hewitt employs approximately 24,000 associates.  For more information, please visit www.hewitt.com.

(1) Average is weighted; preliminary HMO increases are before plan changes, negotiations and terminations.

Maurissa Kanter

Hewitt Associates,  (847) 883-1000