Cost of Health Care for State’s Big Firms Falls 2.5% in 1996

WASHINGTON — Health-care costs for big employers in California dropped an average 2.5% last year as businesses completed the shift of virtually all their workers into some form of managed care, according to a study released Monday. But rates have already begun to head back up.

California is a veritable “island of HMOs,” creating tough competition that has been driving down costs for many large employers for several years, said Glenn Meister of A. Foster Higgins & Co., benefits consultants who surveyed companies with more than 500 workers.

But the days of premium-rate cuts may be over, health-care industry officials say. California HMOs are expected to ask employers for rate increases of about 4% to 6% next year, contending that the hikes are justified after several years of rate declines, industry officials said.

Many of California’s biggest companies have pushed through sizable rate reductions in the last few years. But last year was the first time in the 11-year history of the survey that the cuts outweighed the increases. The decline compared with a 1.8% rise the year before.

By contrast, companies nationwide with more than 500 employees recorded a 3.6% increase in medical costs after a 3.5% rise the previous year, according to the Foster Higgins survey.

The release of the latest report coincided with a survey showing that about three-quarters of insured Americans now receive coverage through systems requiring them to use specific networks of doctors and hospitals, compared with just 51% as recently as 1993. The survey was reported in Health Affairs magazine.

The most advanced use of managed care is in California, the birthplace of large-scale health maintenance organizations, which largely explains the state’s greater progress in cutting health-care premiums.

California companies are much more likely to utilize “pure” HMOs, in which employees receive care from a restricted network of doctors and hospitals and must obtain a referral from their primary care physician before being allowed to see a specialist.

About 70% of workers at the bigger companies are enrolled in HMOs in California, far greater than the national figure of 26% reported by Foster Higgins.

More common elsewhere are preferred provider organizations, which amount to a large list of approved doctors and hospitals. Typically, workers enrolled in PPOs can go to any of the doctors, including specialists, without getting an advance referral. About 36% of workers are enrolled in PPOs nationally, compared with 22% in California, according to the survey.

The fastest-growing variation of managed care is so-called point of service, which combines an HMO-type network with the ability to go outside to consult doctors. But the worker must pay an annual deductible and a co-payment for using a doctor outside the network. Usage is 16% nationally and 6% in California.

Traditional indemnity coverage, in which the insurance policy pays for visits to any doctor or hospital, is rapidly disappearing, now covering 22% of workers nationally and a scant 2% in California, Foster Higgins said.

Despite last year’s decline, the corporate cost honeymoon may be ending. Costs in California could start rising again soon because of sagging HMO earnings, and because “they’ve driven the doctors [charges] down about as far as they can go,” Meister said.

Increased market concentration in the state also could restrict competition, he said. The top four HMOs in California, after the completion of mergers now in progress, would have 10 million members.

As HMO usage increases, “the slack is coming out of the rope,” said Michael McGinn, senior vice president at the Segal Co., an employee benefits consulting firm.

Corporations, determined to bring costs under control, have reshaped dramatically the health-care benefits they offer to their workers. They moved employees into HMOs and other varieties of managed care, which offered fewer choices and more restricted spending.

This brought a halt to the surge in premiums, which were roaring ahead at a double-digit rate during the 1980s, with health-care inflation two or three times as rapid as the general rate of price hikes.

For all employers nationally, a broad-based survey covering those with more than 10 workers, Foster Higgins reported a 2.5% rise in health costs last year, compared with 2.1% the year before.

The savings to companies has had a mixed impact on workers. Some of the cost savings to companies comes from a shift to its employees, who are often asked to pay a larger share of the monthly premiums for health insurance. And deductibles and co-payments are rising sharply for those whose chronic health conditions force them to stay with certain specialists, even if these specialists are not included in their corporate HMO directories.

Overall, health coverage among the work force is declining, because the fastest job growth is coming among small firms, where business is least likely to offer health insurance.

Fewer Americans under 65 are covered through work today than in 1989, according to figures compiled by the Employee Benefit Research Institute.

Times staff writer David R. Olmos contributed to this report.

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California Rates

Traditional fee-for-service plans and health maintenance organizations are less expensive in California than in the nation as a whole. Cost per worker in 1996 at companies with more than 500 employees:

Fee-for- service plans

Nationwide: $3,928

California: $3,753

HMOs

Nationwide: 3,350

California: 3,116

Preferred-provider plans

Nationwide: 3,434

California: 3,940

Point-of-service plans

Nationwide: 3,584

California: 3,624

Note: Preferred-provider plans give patients lower rates if they use physicians from a preferred group of doctors. Point-of-service plans give patients the option to go to doctors and hospitals outside the plan, but require them to pay more for the right to do so.

Source: Foster Higgins