Health Care Cost Increases Remain High

Armen Hareyan's picture

Health Care Costs

Health care costs are expected to increase on average 11 percent in the next 12 months.

While costs continue to rise at double-digit rates, the current trend rate has declined more than four percentage points since fall 2001, when the projection was 15.6 percent.

Aon Consulting surveyed more than 70 leading health care insurers (representing more than 100 million insured individuals) and found that health care costs are projected to increase by 10.9 percent for HMOs, 10.8 percent for POS plans, 11.2 percent for PPOs and 10.7 percent for CDH plans. This represents rates of increase lower than one year ago, when HMO cost increases were 12.2 percent, 11.9 percent for POS plans, 12.4 percent for PPOs and 12.5 percent for CDH plans. (See below for a table outlining trend data from Aon Consulting's prior health care surveys.)

"Although it is encouraging to see a continuing decline in health care trend rates, employers are still challenged by the fact that health care cost increases are more than four times general inflation rates, said Bill Sharon, senior vice president with Aon Consulting and director of the study. "For many businesses, health care costs continue to be their fastest growing expense."

According to Sharon, there are a variety of reasons for the double-digit health care cost increases, including:


-- Increasing patient demand for health care services as the population ages;

-- Rising medical technology and hospital costs;

-- Increasing price and utilization of prescription drugs;

-- Poor lifestyle choices.

"Fortunately, employers have a number of strategies at their disposal to reduce the rate of these increases," Sharon explained. "Some of the more successful strategies consist of implementing consumer driven health care plans, chronic condition management programs and health promotion programs. Coupled with plan design changes and/or employee contribution changes these strategies can reduce an employer's health care cost increase by more than half."

Health care rate increases for retirees over the age of 65 are projected to be 11.2 percent for Medicare Supplement plans and 9.2 percent for Medicare Advantage plans. "We believe the lower Medicare Advantage trend rate is due to favorable government reimbursement rates and the competitive market for these plans," said Jonathan Nemeth, senior vice president with Aon Consulting.

For prescription drugs, general pharmacy costs are expected to increase by 9.5 percent, compared with 12.2 percent one year ago. Specialty drug costs will increase by 15.1 percent, down from 17 percent from spring 2006. (Specialty drugs are biotechnology-derived injectable medications used primarily to treat high-cost disease states.)

Aon Consulting conducts the Health Care Trends Survey every six months to ensure that its human capital clients and the industry on the whole have an up-to-date point of reference for planning purposes.