We've heard it all before about health care cost inflation dropping.  Even after biggest recession in decades, health care costs continued to spiral upward, so you'll understand my skepticism about reports of health care cost inflation dropping.  Will it happen this time?  Hard to say for sure, but a trio of recent studies say cost increases will moderate and drop below 10% annual cost inflation this year.

According to the most recent study, the annual Buck Consultants report on employer-provided health care, costs for medical plans in the U.S. are expected to increase by 9.9 percent for 2012.  This is the first time since 2001 that Buck's survey has projected cost increases less than 10 percent for any type of employer-provided medical plan, albeit by a slim margin.

In its National Health Care Trend Survey 2012 report, Buck found that costs are projected to increase at rates that are more than a full percentage point lower than its survey for 2011.  For just about any other type of product or service, a 10% annual increase would be considered runaway inflation, but for healthcare costs, 10% would be a considered a low growth rate compared to cost increase trends over the past couple of decades.  The table below shows the predicted growth rate in health care cost for employers in 2012 vs. 2011.

"The reduced trend factors reported in our survey reflect that health insurers, who may have previously added margins to account for health care reform benefit changes mandated for 2011, have now removed those margins for 2012 projections," said Daniel Levin, a Buck principal and consulting actuary who directed the survey. "The reduction also reflects lower expected costs as a result of the economic slowdown. Employees are trying to reduce their out-of-pocket expenses and are postponing elective medical services.
"The trends are not varying by plan type as they have in previous surveys," added Levin. "This may indicate that insurers do not currently see network type as a significant reason for modifying trend factors."

Among other findings from the Buck survey, for prescription drug plans, health insurers reported an average cost increase trend of 9.6 percent, down 1.1 percentage points from the 2011 survey. This rate of increase though is more than twice the 4.6 percent increase reported by pharmacy benefit managers (PBMs), third-party administrators of prescription drug programs.

"Despite the lower trend factors found in our survey, health care costs continue to outpace both general inflation and wage increases, creating real business challenges for organizations," said Levin. "We've seen increased interest from plan sponsors for strategies to optimize alternative delivery systems such as exchange models and accountable care organizations."

Two other recent health care cost surveys are projecting even lower rates of cost inflation for 2012. According to the National Survey of Employer-Sponsored Health Plans conducted by Mercer, growth in the average total health benefit cost per employee, which had reached 6.9 percent in 2010, slowed to 6.1 percent in 2011, with an increase of 5.7 percent expected for 2012. The large difference between the Buck and Mercer studies may be accounted for by employer cost sharing, via passing on a portion of their cost increases to the workforce.

According to the Towers Watson's "Health Care Changes Ahead" survey report, health care plan costs were expected to rise 5.9 percent in 2012 compared to 7.6 percent in 2011.

Regardless of the somewhat differing predictions, since all three studies are projecting lower levels of health care cost inflation, let's hope they're all correct!

Is it actually possible that we could have moderate healthcare cost increases in 2012?  For those of you that follow this type of information. you're likely aware that "moderate" is not a word that accurately the trajectory of health care costs over the years.  Even during the very week economy of the past few years, healthcare costs have risen 8% - 10% per year.

Preliminary results though from Mercer's National Survey of Employer-Sponsored Health Plans 2011 though is predicting a very modest (by health care standards) increase if 2012.

The latest Mercer survey finds health benefit cost growth for 2012 likely to be the lowest in 15 years:

• Preliminary data from Mercer's annual survey indicate that the average cost of employee health  coverage will rise 5.4% in 2012 (after modest plan modifications).
• Slowdown in utilization of health services is holding down cost growth.
• Employers are increasing their investment in consumerism and health management.
• The rising gap between health benefit cost growth and workers' earnings remains.

Preliminary data from the Mercer survey suggest that the average growth in health benefit costs will slow to 5.4% in 2012, the smallest increase since 1997.  Still, cost growth remains well above both general inflation and growth in workers' earnings (see Figure 2). 

While this increase reflects cost-cutting changes employers will make to their current health benefit programs, such as raising deductibles or moving employees into lower-cost health plans, the survey findings released by Mercer suggest that the underlying trend has slowed as well.  Asked how much cost would rise if they made no changes to their current plans, employers reported an average increase of 7.1%. Over the past five years, this underlying health benefit cost trend has been running at about 9%.

The slower trend is good news for workers, because an employer's first line of defense against a high initial renewal rate typically is to change plan provisions so that employees pay more out of pocket for health care. If the underlying trend is lower to begin with, employers will be likely to engage in less cost shifting than they have an recent years.

Understanding the slower cost growth for 2012 means looking at the factors working to hold down the underlying trend along with the actions employers are taking to reduce cost next year. Use of health services, which slowed this year, is one such factor. Some analysts believe the tough economy, combined with generally higher deductibles and other forms of cost-sharing, is affecting utilization – that because employees have less disposable income and are working longer hours, they are less likely to seek non-urgent care.

Employer cost management tactics for 2012

While the underlying cost trend may slow in 2012, an increase of more than 7% – twice the rate of general inflation – is still higher than many employers are willing or able to absorb.  Some plan to shift cost to employees by raising premium contributions in 2012. Employers are slightly more likely to increase contributions for dependent coverage (36%) than for employee-only coverage (33%). The difference is greater among the largest employers (42% will raise dependent contributions and 36% will raise employee-only contributions); they may be attempting to compensate for enrolling more dependents under the health reform law's rule stipulating that employees' children up to age 26 be eligible for coverage.

About a third of the survey respondents (33%) say they are raising deductibles or co-payments in 2012. The past five years have seen employers increasingly using this type of cost-shifting, driving the median in-network PPO deductible for an individual to $1,000 among small employers (those with 10–499 employees) and to $500 for large employers last year.

One way employers can give employees a stake in their health care spending without creating a disincentive to use health services when needed is with consumer-directed health plans (CDHPs). These are high-deductible plans with an employee-controlled spending account – a health saving account (HSA) or health reimbursement arrangement (HRA). Many of these plans give employees an incentive to take cost into consideration when seeking health care services by allowing them to save, on a tax-advantaged basis, account dollars they don't spend in a given year for future needs. Preventive care is covered in full.

"We're expecting to see a spike in 2012 in both the number of employers offering CDHPs and in the number of employees enrolling in them," said Beth Umland, Mercer's director of research for health and benefits. "Employers see them as a way to provide more value to employees while at the same time managing cost."

CDHPs are significantly less expensive than traditional PPOs or HMOs – by about 15%, on average. The use of CDHPs has been growing steadily over the past five years, particularly among the largest organizations. In 2010, offerings of CDHPs ranged from 14% among employers with 10–49 employees to 51% among those with 20,000 or more employees.  Survey results suggest there will be an increase in offerings of these plans in 2012: 18% and 58% of the smallest and largest survey respondents, respectively, say they plan to offer a CDHP in 2012.

"While 2012's slower cost growth is welcome news, it's still higher than the CPI – which means employers won't be letting up their efforts to control costs anytime soon," said Susan Connolly of Mercer. " Advanced strategies like limited provider network plans and more intensive employee education and engagement will continue to evolve."

Medical costs rose sharply during the recession and are continuing to rise at several times the rate of inflation, despite a poor economy, weak demand for medical services and generally low inflation.  Despite what you may have learned in economics 101 in college, the law supply and demand has seemingly little impact on medical cost inflation.

Two recently published studies show or predict costs rising at an approximately 8% annualized rate, even while demand for medical services is not growing much and inflation remains at very low levels (other than gas prices, of course!).

The PricewaterhouseCoopers (PwC) Health Research Institute recently predicted that employer health care costs will rise by about 8.5% in 2012, after rising by about 9% a year in both 2010 and 2011.  Even with modest cost-sharing and other plan changes, most employers can expect about a 7% increase on health plan costs over the next year.

The recently published 2011 Milliman Medical Cost Index (MMI) reports that in 2010 costs increased at a 7.3% rate to an average of over $19,300 a year for a family of four on a PPO plan, more than double the $9,235 cost in 2002.  The employee portion of these costs have also more than doubled, from about $3,600 in 2002 to just over $8,000 in 2011.

As costs have soared over the years, the employee's share of the total costs have also been increasing.  The MMI report states that the employee share of total health care cost have increased to nearly 40% (39.7%) of total costs, up from 36.8% in 2005 when they started tracking this metric.

Neither report offers much hope for a reduction in cost growth (the roughly 8% current medical cost inflation rate is down from annual increases in excess of 10% for most of the last decade).  The likely ongoing trend will be further cost-shifting to employees, even with employers absorbing much of the increased costs.

We believe that the ongoing high medical cost inflation rate also has the indirect effect of keeping a lid on merit and pay increase budgets (even in better times), as employers have to incur ever-increasing fixed benefits costs, even in times of economic stress and low inflation (and low pricing flexibility for their own products and services).

The PwC report states that 84% of employers are planning to make changes to their health plans to try and offset some of the expected cost increases.  A similar percentage (86%) state they are likely to re-evaluate their overall benefits strategy, while one-half are considering reducing or eliminating subsidies on dependent medical coverage.

Thank you to my "guest posters" for sitting in while I was away!  I'm back, but will have a few more guest posts, because so many colleagues were nice enough to contribute.  Getting back to my own work though, temporarily at least, the following post is a from my recent post at the Compensation Cafe.

The days of near-guaranteed base pay increases and growing employer contributions to ever-increasing benefits costs are slowly (but surely) dwindling.

No, base pay isn't going away, nor are periodic pay increases, but the battle against the growth in fixed compensation costs (base pay, health care costs, etc.) is gaining strength, even as the economic recovery starts to take hold.

Most employers are willing to pay out increased compensation, but today much of those pay increase budget dollars are going into variable pay, which typically flexes with organizational performance and ability to pay. The trend toward increased variable pay has been going on for two decades, but it seems to have hit a "tipping point" in recent years, as organizations struggle to absorb a never-ending battle with health care cost increases (crowding out merit budgets in the process), while trying to get more "bang for their buck" with their compensation dollars.

While organizations try to keep a lid on fixed costs, more enlightened employers realize that there's more to the "attract, motivate and retain" equation than just base pay and benefit dollars. But before going on, let's look at some general reward trends over the last few decades, and how we ended up where we are at today.

• The 1970's and 1980's: plain-vanilla base pay and benefits; defined benefit (DB) pension plans were common in larger, manufacturing and/or unionized organizations. Variable pay is confined largely to executives and sometimes middle management.
• The 1990's: many employers add variable pay (or push variable pay into lower levels of the organization) and other reward elements into the mix, such as stock option programs. Many employers freeze or eliminate DB pension programs and retiree medical as just too costly to maintain. Health care cost sharing is increasingly pushed down to employees. The 401(K) is the new pension program.
• The 2000's: a greater movement towards "total rewards," including variable pay for the masses and a greater recognition of the need to pay more attention to qualitative vs. purely quantitative (dollar dominated) rewards. Employers continue efforts to contain fixed costs, especially in the form of sharing increased health care costs with the employee base.
• The 2010's: as we enter a new decade, we see a greater focus on comprehensive or "holistic" rewards, including a movement away from purely quantitative rewards to qualitative and work-life rewards. Qualitative rewards include career/job growth and development opportunities, increased focus on organization culture and communication, work flexibility options, work-life "fit"options, and  creating a culture of appreciation/recognition.

Decades ago, Herzberg's work on motivation and job enrichment theorized that that pay is a more of a "satisfier" (it can meet basic needs and satisfy, but cannot make employees "happy" about their employment).  Confirming this, many studies have shown that pay is generally not the reason employees leave organizations (unless pay is noticeably below what's available in the relevant labor market); it was considered more of a "hygiene" (in Herzberg's terminology) or satisfaction factor. I believe this is an accurate characterization of base pay's role in job satisfaction, even today.

In reality, it's how managers treat and manage their staff, and how leaders lead their organizations that has the greatest impact on retention, job satisfaction and the propensity to turnover.  This is where rewards are headed; not just dollars (there are so few to spread around these days), but with qualitative or psychological rewards that can help to engage and retain employees (or to dis-engage and repel workers when not provided, or provided poorly or disingenuously).

Qualitative or psychological rewards focus more on genuine management/leadership, honest communication and regard for employees; building a culture of respect and appreciation, providing honest and constructive performance feedback, offering career and professional development opportunities, offering work flexibility and work-life balance fit options.

With the limited merit budgets of today and (predicted) for the future, there is just not enough "oomph" in the dollars that employers can offer to assist too much with the critical ideal of "attract, motivate and retain." Variable pay will help, but most of the rest will have to come from other types of rewards.

It's time to start thinking beyond dollars...


Doug Sayed is principal at Applied HR Strategies, a Seattle-area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, and hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.

If yesterday's graphic didn't scare you, this one might help you get the gist of why REAL healthare reform is critical to the costs your organization incurs for healthcare, as well as for the entire country, and especially for the taxpayers (and your children/grandchildren) that will foot the burden of out-of-control healthcare cost growth.

Some may ask why I'm on a soapbox about healthcare reform recently, and the answer is really quite simple.  Healthcare reform, without real reform, is just another way to pump even more money into the machine that is slowly but surely bankrupting our country. 

The current plans on the table, while offering some "mini" reforms, basically just pump another trillion or so dollars into the same high margin, fee-for-service machine that has led to a never-ending spiral of cost increases several times the overall rate of inflation for the past few decades (even in the 2008-2009 economic slump, the worst in decades, healthcare costs are expected to rise in low double digits annually, even while consumers are cutting back on medical care!).

Of course, most Americans are concerned about what come out of their pocket for care, and that's understandable.  But what I believe many fail to realize is someone is paying for all the care that you're not paying for, and those "someones" are your employer, your government, your children and grandchildren, and you (indirectly, through taxes and deficits).

So, even if you think you're not paying for it, you really are, because it is built into the cost of the goods you buy, the massive deficits we're racking up, higher cost your employers are paying (which otherwise might go towards pay increases or hiring, but those costs are diverted to healthcare instead).

The healthcare crisis in America is not going away, with or without the current plans on the table.  It's time for all Americans to demand real reform (at least if you're concerned about the world you, your children and grandchildren will live in, in the the coming decades).  Reform that will restrict and/or eliminate the current fee-for-service model, and move towards evidence-based treatments, outcome-based payments, best-practice models, and yes, even some reasoned rationing, because everybody can't have everything they want (at little or no out-of-pocket cost, of course) and not expect the costs to soar.

I feel better, now that I've blown off some steam!  Please do you part.  This really is a crisis, even if you don't feel it yet.

Scariest Graphic Ever - Healthcare Costs!

If looking at this graphic doesn't scare you, then either you've been living in a cave, or must not care to much about the future of our country.

Healthcare costs are swallowing up an ever-growing percentage of our country's total spending, currently between 16% and 18% of GDP (depending on the study).  If current trends continue, healthcare spending will hit 20% of GDP in a few short years (yes, that's one of every five dollars spent in the U.S. is being spent on healthcare alone).

Healthcare is bankrupting this country, and it's time for everyone to become more informed and involved.  For a couple of good summaries of the issues and proposals, see this article in the Wall Street Journal (subscription may be required) "Ten Questions on the Health-Care Overhaul."  Another great overview most recent healthcare proposals coming out of Washington DC comes from the Terri Albee of the Compensation Cafe'. See her post here.

Don't let the special interests (and there are lots of them) rule your future.  Read up and speak up now!

If you see any real healthcare cost containment going on, please let me (and the rest of the country) know.

Each year some major consulting firms and others conduct their annual healthcare cost studies, and while the trends seemed to be moving toward slightly lower annual increases (down to the upper single digits, from the low double digit percentage annual increases), the last two studies I've seen are predicting roughly 10% annual increases in healthcare cost for 2009 and 2010, in the middle of major a major recession with virtually no (non-healthcare) inflation!

For instance the Buck Consultants 20th National Health Care Trend Survey is predicting between 10% and 11% annual increases (depending on plan type) for 2009 and 2010.  In other words, while wages are are flat to down in real (post-inflation) terms and companies suffering from falling sales and profits, somehow, healthcare can increase 10% in cost.

I've been reading about how many consumers are delaying going to the doctor, and not electing to have elective procedures done, but costs still go up 10%?  Somewhere I recall hearing about this concept called "the law of supply and demand," but apparently I was mistaken about that!

Healthcare costs for employers have more than doubled since the turn of the century and employee's out-of-pocket cost have tripled. Healthcare is slowly bankrupting our country.

I'm not a fan of government intervention in the free market, or of government-provided healthcare, but something has to be done.  In 1980, healthcare was about 9% of GDP, and in 2009 it will be approximately 18%.  We're heading toward 20% of GDP being spent on healthcare in this country within a few years.  Yes, you read correctly, one out of every five dollars spent in this country, will be spent on healthcare alone.