Employee Health Benefits on a Winning Streak?

Mercer, a leading firm of consulting actuaries, tells us that the cost of employee benefits in 2016 will grow slowly – a “winning streak”:

Early responses from a major Mercer survey still in the field show employers predicting that health benefit cost per employee will rise by 4.2% on average in 2016 (see Fig. 1) after they make planned changes such as raising deductibles or switching carriers.

One way employers have learned to keep cost growth low by increasing deductibles. We call this “consumer-driven health care” because when employees control a larger share of health dollars directly they will consume medical care more prudently. The next step is private exchanges, which give employees a wider choice of plans. These exchanges have reduced benefit costs.

However, we still have not cracked the problem that prices are formed by health plans and providers: Patients can increasingly react to prices, but they cannot participate in forming prices, like they do in normal markets. This might explain why there is no real reduction in growth of the cost of employee benefits, despite Mercer’s cheering a “winning streak.”

Indeed, even without the increase in deductibles – which have risen seven times faster than wages over the last ten years – the real growth in cost of health benefits is a little higher than it was a decade ago. This is clear in Mercer’s Figure 1. Current price inflation is zero, so the nominal cost growth of 4.2 percent is all real growth. In the mid-2000s, nominal cost growth was a 6.1 percent annually, but inflation was around 3 percent, indicating real growth of about 3 percent.

Overall, if the cost curve is bending at all, it is bending in the wrong direction.