A Healthy Increase

CFOs expect health-care costs to rise 6.8% on average this year, with the biggest increases coming at tech, software, and biotech companies.

How much will health-care costs go up in 2010? According to the Duke University/CFO magazine Global Business Outlook survey of financial executives in the fourth quarter of 2009, the increase will average 6.8% over the next 12 months. That’s up from the previous quarter’s estimate of 6.0%.

“This is a slight uptick, but it’s basically consistent with what we’ve been hearing for the past few years,” says John Graham, finance professor at Duke’s Fuqua School of Business and director of the survey. He adds that it’s a far cry from the 9% increases CFOs were reporting five years ago.

Eight percent of CFOs listed rising health-care costs as the top internal concern facing their company; about 30% listed it among their top three internal concerns. (Maintaining margins was number one.)

In general, health-care costs are being driven up in equal measure by two main factors: increased prices for medical goods and services and an increased number of services offered thanks to technological advances, says Bob Tate, chief actuary for the health-management consulting business at Hewitt Associates.

For most companies, those two factors lead to an 8% or 9% increase, Tate estimates based on Hewitt data, but many firms shift some costs to employees in order to get the net increase down to a smaller number. Indeed, 28% of survey respondents reported reducing their contribution to health plans in the past quarter, most on a permanent basis.

The Duke/CFO survey also revealed a number of differences in health-care cost expectations by industry. Finance executives in the technology, biotech, and software fields expected a 10.8% increase as a group, the highest by far in the survey (see “Changes Ahead,” below). Mining and construction executives — who would likely carry employees at high risk of injury and subsequent medical care — reported the lowest expected increase, at 4.8%.

Graham says such variations provide a window into the relative labor supplies within some industries. “Elsewhere in the survey, you can see that one of tech’s biggest concerns is attracting and retaining qualified employees, and they’re probably using [health care] as a retention tool, ” he says. “At the other end of the spectrum, mining and construction don’t rank attracting and retaining employees as a concern at all.” (According to the survey, 20% of technology executives rank employee attraction and retention as their top worry, while fewer than 5% of mining and construction executives do.)

“Tech firms in particular tend to have more-generous coverage,” notes Dean Hatfield, senior vice president and health-practice leader at Sibson Consulting. “They experiment with a lot of unique ideas and have things like on-site dental and vision,” which can create higher costs through higher utilization.

Health-care firms are also reporting lower-than-average cost increases this year. In part that’s because many of them, especially hospitals, can “steer their employees into their own facilities, so it would be a pass-through cost,” says Hatfield. “Plus, they’re getting [goods and services] at the true cost basis.”

The relative size of a workforce also contributes to cost expectations. Mining and construction executives, who expected the lowest health-care increases, are planning to cut domestic full-time staff by an average of 4%, the largest cut of any industry. By contrast, the tech/biotech/software sector is planning to boost its ranks by 2.7%.

Firm size also had an effect on expectations, with smaller companies (revenues under $25 million) seeing nearly 10% increases, while the largest companies (above $10 billion) expected about 5.5% average increases.

Besides size of the workforce, plan design, and company contribution level, the main drivers of health-care costs are geography and the age of the workforce, Tate notes. In a recent study by the Society of Actuaries regarding the debate in Congress over whether more-expensive health care plans should be subject to a 40% excise tax, the society found that “whether a particular group’s premiums would hit the tax was at least as dependent on the geographic location of the group and the demographics as much as plan design,” says Tate, who supplied some data for the report.

 

Changes Ahead

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