Moving boldly to stem health-care spending.

• Author: Guilmette, Dave
• Position: Health care

Health-care costs that have been increasing at rates well above the consumer price index for more than a decade pose a risk to employer's balance sheets and bottom lines--even in good times. In the current economic storm, they stand as a lightning rod for heightened financial scrutiny, In what may be the worst financial crisis in 80 years, many United States firms are having to make hard decisions--and fast.

With the downturn showing no signs of abating quickly, finance and human-resource leaders are taking a harder look at how recent economic events may impact health-care bud sets and future plan designs. And many are recognizing that emerging economic and labor market trends provide a platform for defining more aggressive--and cost-effective--terms for employee participation in employer-sponsored health-benefit programs.

Research suggests that most employers are avoiding the mass workforce the mass workforce reductions that accompanied past economic contractions; unemployment stood at 6.7 percent in early December, and is widely expected to grow to 8 percent in this year. But ongoing job losses could trigger higher than expected health and disability plan costs due to increased COBRA exposure, increases in stress and absenteeism and the rise in disability claims that traditionally accompany reductions in workforce.

Any increase over projected costs represents a significant burden to employers. According to Towers Perrin's 2009 Health Care Cost Survey--which examines prospective cost increases for 2009 plans offered by more than 600 of the nation's largest employers--health-care costs will increase 6 percent in 2009 to an average total cost of $9,552 per employee, an all-time high.

In this cost-constrained environment, any additional expenditure incurred as a result of increased utilization by an anxious workforce will have to be made up elsewhere--and quickly. And, while some companies may consider traditional cost shifts or benefit reductions, others--mindful of a reform-focused Barack Obama administration--are hesitant to simply shift their growing costs to employees who may not be able to afford the added burden. The big question is: how will employers cut growing costs?

Growing Mandate for Demand-side Management

Most finance executives recognize that there are two parts to the health-care cost equation: management of the supply side of care; and management of demand for care.

Over the last five years, organizations have been successful at holding over-all health-care cost increases to single-digit levels by tightly managing provider networks, holding down provider reimbursement levels, pushing for increasingly deeper discounts and taking other steps to drive cost-efficient delivery of health-care services.

And...