Why Employer Benefit Costs Are Rising Slowly



Aon Hewitt, a leading actuarial consulting firm, has reported extremely good news about the cost of employee benefits:

2015 Records Lowest U.S. Health Care Cost Increases in Nearly 20 years

– Rate of increase was 3.2%

– Average health care cost per employee topped $11,000

– Employees’ share of health care costs have increased more than 134% since 2005

After plan design changes and vendor negotiations, a recent analysis by Aon (NYSE: AON) shows the average health care rate increase for mid-size and large companies was 3.2 percent in 2015, marking the lowest rate increase since Aon began tracking the data in 1996. Aon projects average premium increases will jump to 4.1 percent in 2016.

Aon Hewitt’s 3.2 percent rate of growth includes only premiums. When employees’ out-of-pocket costs are included, the reason for the slow growth becomes apparent.

Table I shows total premium grew 21.6 percent over the six years, 2011 through 2016. However, the employee’s share of premium grew by 30.1 percent, versus just 19.2 percent for the employer. (Economically, both contributions are from the employee. The employer’s share is lost wages to the employee. Nevertheless, the employee’s share is transparent to him, whereas the employer’s share is disguised.)

Even more substantial is the growth in out-of-pocket costs: 70.7 percent over the period! This resulted in out-of-pocket costs growing from 13.1 percent to 17 percent of total health costs. That is still small, but moving in the right direction.

Americans should not bemoan the growth in out-of-pocket costs. It simply means we have more direct control of a greater share of our health dollars. It is the most obvious factor explaining relatively restrained growth in benefits costs in recent years.

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