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Update: How much are health care costs rising? It depends on who’s measuring

Exactly how much have health care costs risen? And how much are they anticipated to rise? Well, it all depends on whom you ask and what numbers you’re looking at.

“Bending the curve” in projected health-care cost growth was an often-repeated goal during the debate leading up to the recently signed legislation, and to a large extent, the view on future cost growth will frame the debate on whether the new law is successful.

Exactly how much have health care costs risen? And how much are they anticipated to rise?

Well, it all depends on whom you ask and what numbers you’re looking at.

Spending in the $2.5 trillion health care economy has risen faster than inflation for some time.

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The Kaiser Family Foundation reported total health care expenditures grew at an annual rate of 4.4 percent in 2008, a slower rate than recent years, but still outpacing inflation and the growth in national income.  The health care economy currently makes up more than 16 percent of gross domestic product, the largest percent of GDP in the world.

Costs to employers is a different matter altogether.

Reuters reported that Deere & Co (NYSE:DE) and Caterpillar Inc (NYSE:CAT) estimated a combined $250 million in one-time charges in SEC filings Thursday. The charges will cover added costs as retiree prescription drug benefits become taxable under the new law. Administration officials reportedly called the estimates “premature.”

Several other large employers with significant retiree health benefits also warned that they would incur one-time hits, but so far no other companies have weighed in.

Woodbury-based 3M Co. (NYSE:MMM) joined a growing roster of large employers gauging the cost impact of the health care legislation on prescription drug benefits for retirees. In a filing today with the SEC, 3M said that it expects to record a one-time non-cash charge of $85 to $90 million after tax, about 12 cents a share, in the first quarter of 2010.

The charge is the result of a reduction in the value of the company’s deferred tax asset because of a change in tax treatment of retiree prescription drug benefits.

According to press reports, other companies that have made similar announcements to date include Deere, $150 million; Caterpillar, $100 million; AT&T, $1 billion; Valero Energy, $15 million to $20 million; and AK Steel, $31 million.

In 2009, average health care costs for employers nationwide rose 7.3 percent, according to a Thomson Reuters survey of employer claims data for 144 small, medium-size and large companies  covering  9.5 million individuals. But again, cost growth varied, depending on the size of the company.

Among small employers (fewer than 5,000 employees), health care costs increased 9.8 percent, nearly double the 5 percent growth seen in 2008, according to the Thomson study. Medium-size employers {5,000 to 50,000 employees) saw cost increases accelerate from 6.5 percent in 2008 to 10 percent in 2009. Among large companies, costs rose 5 percent in 2009 — a decrease from the 5.8 percent recorded in 2008.

Source: CPI, U.S. bureau of Labor Statistics

And the cost increases are expected to continue. A month ago, before legislation passed, compensation consultant Buck Consulting projected double-digit growth for employer costs in 2010.

The experience of Minnesota employers seems to bear out the survey data.

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“Absolutely absurd” and “completely out of control” is how Lion Precision’s president, Don Martin, described employer health care costs. He said his $1,200-per-month health insurance premium for the 25-employee firm is “the single largest bill we pay every month.”

Two years ago, Lion saw its health care costs jump 25 percent in one year, in what Martin described as a “low-claim year.” As a result, he switched providers and his costs stayed flat the following year.  But he said he has just been informed that premiums will go up 30 percent next year for the small St. Paul-based electronics manufacturer.

“People are making life decisions based on health insurance,” he said, and the current health insurance system prevents people from starting their own a businesses, he believes. “I don’t know what Obama’s plan is going to do, but it can’t be worse than what we’ve got,” he observed.

St. Cloud-based Gold’n Plump Poultry, which employs 1,500 in four plants in Minnesota and Wisconsin, has seen its health care costs increase “in excess of 10 percent a year over the last two years,” according to a company spokesperson. While the employee population has remained relatively stable over that period, health care costs have risen at a faster rate than other elements of compensation at the family-owned poultry processor.

So what about the individual consumer?

Again, it all depends.  Some employers have increased deductibles and out-of-pocket limits in an effort to shift costs to employees and hold their costs down, but that’s a difficult-to-track measure beyond anecdotal examples.

Possibly the most comprehensive data on prices comes from the consumer price index (CPI) database — a broad basket of goods and services sampled across the nation and reported by region by the U.S. Bureau of Labor Statistics. The current CPI data show that Twin Cities residents’ out-of-pocket costs have risen almost three times the rate of inflation from 2005 through 2009.

Health care costs, from prescription drugs to medical services, rose at an annual average of 5.75 percent for Twin cities residents, compared with an overall CPI growth rate of 2 percent in the metro area.

For the Midwest in general, health care costs grew at a 4.05 percent annual rate, slightly above the 3.05 percent national average since 2005. The CPI for all goods and services grew at an annual rate of 2.04 percent in the Midwest and 2.38 percent across the nation, over that same period. 

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One component of health care costs in the CPI is health insurance. According to Dan Ginsburg, supervisory economist at the bureau, they only began estimating that measure in 2005 and only on a nationwide basis. It is an estimate based on retained earnings of the insurance companies and, like most statistical samples, is more interesting in the trending over time than in any absolute sense.

Where to learn more
Here’s a sampling of where to go for more information:

The Kaiser Family Foundation. “A non-profit, private operating foundation focusing on the major health care issues facing the U.S.”

Consumer Price Index, Bureau of Labor Statistics. Lots of numbers, brought to you by the U.S.government.

Society for Human Resource Management. “The world’s largest association devoted to human resource management.”

Agency for Healthcare Research and Quality. Summary of government research addressing specific cost and quality issues in health care delivery.

Click on the graphic below to enlarge