HEALTH CARE COSTS: Workers to bear more of burden

Posted December 9, 2002
By Jim McCartney, Pioneer Press

Get a raise for next year?

Congratulations. Now get ready to lose most of it to higher health care costs.

Employers’ health care benefit costs leaped by nearly 15 percent in 2002 — costs generally not passed on to employees, according to a recent nationwide survey by Mercer Human Resource Consulting.

But that’s likely to change. Mercer’s findings, released today, show that employers expect to pay an average 14 percent more for employee health care benefits in 2003. A quarter of all the companies surveyed — and half of the largest ones — expect to pass more costs on to their workers next year.

Health-benefit cost hikes in the Twin Cities and in Minnesota generally were lower than elsewhere in the country during 2002. But expected double-digit increases next year will force more local companies to consider passing costs along to employees, says Blaine Bos, a consultant in Mercer’s Minneapolis office and an author of the study.

“Many employers are saying, ‘I can only take that hit once,’ ” said Bos. “You will see a lot of this slash-and-burn strategy.”

“Slash-and-burn” means passing on costs to the employee by raising copays for services, increasing deductibles and requiring the employee to pay a bigger chunk of premium costs.

“In the first couple years of these double-digit increases, employers were eating the costs,” said Carolyn Jones, health care policy director with the Minnesota Chamber of Commerce. “Now, given the economic downturn and continued increases, companies are looking to reduce benefits or pass on more costs to employees.”

Mercer’s findings are based on responses from nearly 2,900 companies with at least 10 employees. The Mercer study found that small and medium-size employers generally fared worse than large ones. Among companies with fewer than 500 employees, health care costs rose an average 18.1 percent, to $5,492 per employee in 2002; among large employers (those with 500 or more workers), the costs went up an average 11.5 percent, or $5,758 per employee.

Those large Twin Cities employers are faring better than their peers nationwide, with total 2002 health-benefit costs increases averaging 9.2 percent, to $5,465 per employee, according to the Mercer survey.

“In general, the small and medium-size companies get the short end of the stick,” said Mike Hickey, director of the Minnesota branch of the National Federation of Independent Business. “The big employers get the discounts, and the costs are shifted to us.”


While Mercer’s survey found that the nation’s large employers expect a 13 percent increase in health-benefit costs next year, local health plans expect costs to go up much more — between 12 percent and 20 percent for the average Twin Cities employer, according to a recent Pioneer Press survey.

Minnesota’s healthy population and its successful managed-care industry have provided some protection from rising health care costs, Bos said. Because employers here must compete to attract and keep employees, given the Twin Cities’ relatively low 4 percent unemployment rate, they may be more reluctant to pass health care costs on to employees, he said.

But “I think the Twin cities will be closer to the norm next year — we can’t be lower forever,” Bos said.

For some Minnesota employees, the reckoning has already come. Disputes over who should bear the rising costs of health care led to recent teachers strikes in Red Wing and International Falls, as well as the strike a year ago by 23,000 union employees of the state of Minnesota. Recently, Northwest Airlines’ plan to begin passing a significant portion (20 percent) of health care costs on to its 46,000 employees has sparked debate.

“Health costs are a major issue in almost every contract negotiation we see,” said Mitch Franklin, director of mediation services for the Minneapolis office of the Federal Mediation and Conciliation Service. Federal mediators often are brought in when labor negotiations become overheated or stalemated.

“I’m not so sure we’re busier than we have been in the past, but the dispute resolution has been much more difficult,” Franklin said.

For many unions, the bottom line is to reach a contract in which the increase in the employee’s health care costs does not overwhelm the wage increase, he said.

An increase of 15 percent in health care costs was cited by the average employer as the “threshold of pain” prompting them to make “fundamental” changes in their health-benefit programs, according to the Mercer study.

For some smaller companies (10 to 49 employees), the pain has already become unbearable, prompting them to drop health care coverage altogether. This year, 62 percent of small employers offer health insurance, down from 66 percent last year, according to Mercer.


Bos would like to see employees take greater responsibility for their health and the cost of their medical benefits. For instance, some employers have brought in outsiders to help employees with chronic diseases better manage their conditions. Many employees who suffer from arthritis, diabetes, back pain or heart problems don’t take drugs at the prescribed times, they fail to follow an appropriate diet or lifestyle, or they put off medical care until things get bad. The result is poor health and more visits to the doctor or hospital.

Another approach is to encourage consumerism. Some companies offer a three-tiered prescription-drug approach in which patients pay a lower deductible for generic drugs than they do for name-brand drugs. That gives employees an economic incentive to pick the lower-cost generic.

More large employers are offering consumer-directed health plans, in which employees draw money from an employer-funded account to pay for routine health care expenses while being covered for serious illness or injury by a catastrophic insurance plan with a large deductible. The Mercer survey showed these plans had an 85 percent satisfaction rate among employees, Bos said.

Yet consumer-directed accounts have been slow to gain popularity among a broader employer base, as only 2 percent of the companies surveyed offer them.

Hickey would like to see companies take a more flexible approach, but he points out that state regulations mandate certain types of coverage or caps on copays.

That lack of flexibility may be behind this Mercer finding: a 12 percent decline in enrollment in health maintenance organizations (HMOs) nationwide. Some employees are making other choices, while large companies dropped the median number of HMOs offered from two to one last year.

HMO enrollment fell to 29 percent from 33 percent of covered employees nationwide in 2002, while in the Twin Cities HMO enrollment stayed steady at 47 percent of covered employees, according to Mercer.

“By dropping HMOs, national employers get more product flexibility and avoid paying state premium taxes,” said Kirby Erickson, interim director of the Minnesota Council on Health Plans.

The state’s HMOs have already taken a big enrollment hit in recent years, down 7 percent from 1999 to 2001, according to the Minnesota Council on Health Plans.


Jim McCartney can be reached at or (651) 228-5436.

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