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Employer Health Benefit Costs Continue to Rise at Twice the Rate of Inflation, Mercer Survey Finds: As health benefit costs per employee rises 6.1

NEW YORK (Business Wire EON) November 19, 2007 -- The good news is that cost increases have held steady for three years (after spiking to nearly 15 percent in 2002) and are likely to slow a bit further in 2008, to 5.7 percent. The bad news is that's still more than twice the rate of inflation. Health cost growth is outpacing wages and material costs and eroding business profitability.

There are consequences for working Americans as well: In the absence of a mandate to provide coverage, some small employers are simply dropping their plans, adding their employees to the growing rolls of the uninsured. Among employers with fewer than 200 employees, health coverage prevalence fell from 63 percent to 61 percent in 2007 - and that's down from 66 percent five years ago. This drop-off is continuing despite the new availability of relatively low-cost consumer-directed health plans (CDHPs), which may be a concern for state and federal policymakers currently debating the future of US health insurance.

After the out-of-control growth of benefit costs in the early part of this decade, a fourth year of single-digit increases begs the question, why isn't it worse? Shifting costs is one reason. Among large employers (those with 500 or more employees), average in-network PPO deductibles rose by about 11 percent, from $426 to $473 for individuals and from $1,022 to $1,134 for families.

But even if employers made no benefit cuts at all, the rate of increase still appears to be slowing. Employers estimated that the cost of their largest medical plan would increase 8 percent in 2008 "before changes." That's down from 9 percent in 2007 and 10 percent in 2006.

"The slowdown in the underlying trend reflects slowing utilization," said Mr. Bos. "And that is very likely tied to the proliferation of health management activities and other consumerism strategies."

The survey found that 80 percent of large employers use health management programs as a way to control costs and improve productivity, while 52 percent are actively promoting employee consumerism. The majority of employers using these strategies say they have been successful (63 percent for health management and 62 percent for consumerism). Large employers, which tend to be more proactive in managing benefit costs, experienced a somewhat lower average cost increase than small employers in 2007 (5.1 percent compared to 6.6 percent).

Another factor that may have served to slow increasing benefit costs was the growth in enrollment in consumer-directed health plans, the type of medical plan with the lowest cost by far. In 2007, the percentage of employees enrolled in a CDHP (based on either a Health Savings Account or a Health Reimbursement Account) rose from 3 percent to 5 percent of all covered employees.

"As employees shift from more expensive plans into less expensive ones, employers' overall cost per employee drops," said Mr. Bos. "This is what we saw happen in a big way when employees moved out of traditional indemnity plans into managed care plans in the mid-1990s."

Evidence that the plans are cost-effective is accumulating. CDHPs delivered substantially lower cost per employee than either PPOs or HMOs in 2007. CDHP cost averaged $5,970 per employee, compared to $7,120 for HMOs and $7,352 for PPOs. In addition, when Mercer asked about the reaction of employees enrolled in the plan, about three-fifths of the large sponsors with an HSA-based CDHP (61 percent) said it was either "strongly positive" or "more positive than negative."

The early advocates of CDHPs promised these plans would provide an option for small employer health plan sponsors contemplating terminating their plans because of cost. However, as noted earlier, health plan offerings by small employers continued to erode despite the widespread availability of CDHPs in 2007.

"While the average costs of an HSA-based CDHP is about 20 percent lower than the average medical plan, that doesn't make it affordable to all employers. Solving the problem of the uninsured will mean addressing the question of affordability," said Mr. Bos.

So how do employers view the state and federal reform efforts that are aimed at increasing access for the uninsured? The Mercer survey asked whether employers favored or opposed "pay or play" laws: requiring employers to offer a health plan or pay into a fund to provide coverage to the uninsured and mandating that individuals buy insurance. Fewer than a fourth of all employers support pay or play (23 percent), and the larger they are the less likely they are to approve: among those with 20,000 or more employees, only 13 percent approve, while 49 percent disapprove.

"Most large, multi-state employers want to retain flexibility and control over their benefit plans and avoid the burdens and complications of complying with numerous state mandates," said Mr. Bos.

Note to editors - To see the full version of this press release, including charts and information on enrollment in consumer-directed health plans, access for the uninsured and retiree medical coverage, terminology definitions and survey methodology, please visit www.mercer.com

To purchase a copy of Mercer's National Survey of Employer-Sponsored Health Plans, please visit www.mercer.com/ushealthplansurvey

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer's investment services include investment consulting and multi-manager investment management. Mercer's 17,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.com.

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