Towers Perrin Survey Shows Employer-Sponsored Health Benefit Costs Continue to Outpace the CPI — Projected 6% Increase for 2007 Means Annual Cost Per Employee Will Approach $9,000

Variation in Employer Cost Burden Indicates Some Companies Gaining Competitive Advantage — and Saving Millions — by More Effectively Managing Costs

But Growing Threats to Employee Affordability Loom Large With Annual Contributions Nearing $2,000 per Employee

STAMFORD, CT, SEPTEMBER 26, 2006 — According to the Towers Perrin 2007 Health Care Cost Survey, health care costs for U.S. employers are projected to rise by 6% in 2007. That increase, fully two-thirds higher than the Consumer Price Index (CPI), will exert significant pressure on businesses striving to maintain adequate coverage for their employees — and make medical coverage costs increasingly burdensome for all U.S. employees, particularly lower-wage workers and those who retire before becoming eligible for Medicare.

In flat-dollar terms, next year’s gross health care expenditure is expected to rise by an average of $518 per employee, to an average total cost of $8,748. Employers are expecting to subsidize 78% of next year’s premium costs, while employees will have to cover the remaining 22%, plus usage-based copays, deductibles and coinsurance.

While the projected growth rate of 6% for 2007 marks the fourth year of slower increases, the cumulative effect of rising costs has produced record highs for employer-sponsored health plans and, consequently, employee contributions. In fact, health care costs have increased by over 60% in just the past five years (Exhibit 1).

Survey results suggest that, with cost increases continuing well above the CPI, the issue of affordability — for both businesses and employees — could become considerably more challenging in the years ahead as Baby Boomers age and chronic diseases (such as diabetes and obesity) proliferate.

At the same time, however, the survey results show wide variation in per-employee costs among similarly sized companies. This finding offers proof that companies can succeed — and some are succeeding — at effectively controlling ongoing cost increases through a variety of benefit management initiatives.

These observations are drawn from top-line results of the annual survey, now in its 18th year, conducted by Towers Perrin’s HR Services business. This year’s survey database currently includes detailed information on the health benefit programs provided by nearly 170 of the nation�s largest employers, covering 3.5 million U.S. employees, retirees and dependents.

“Our analysis of next year’s employer-sponsored health care costs is a good news, bad news scenario,” said Dave Guilmette, Managing Director of the Towers Perrin Health and Welfare practice. “While it is good news that 2007 represents the fourth year of declines in the overall average rate of increase, it is definitely not a signal that the pressures are abating or that companies can sit back and expect increases to continue their downward trend.”

“The protracted rise in health care costs — whether by single or double digits — is eating into company profit margins and employee wage increases, and taking significant dollars away from other benefit and reward programs,” added Ron Fontanetta, a Principal in the firm�s Health and Welfare practice. “In fact, because most employers can’t pass costs to customers in the form of higher prices, we estimate that, in every year for the last five years, about 1% of wage increases has gone to health care costs. It is a phenomenon we call ‘the hidden paycheck’ because companies have essentially been substituting health benefit dollars for salary and merit increases.”

A Look at the Numbers: 2007 Average Active Employee and Retiree Medical Costs

Looking at the 2007 costs by coverage level,the average reported 2007 cost of medical coverage for active-employee-only coverage is $366 per month ($4,392 annually), $749 per month ($8,988 annually) for employee-plus-one-dependent coverage and $1,079 per month ($12,948 annually) for family coverage:

Exhibit 2: Average 2007 Monthly Health Care Costs and Cost Increases by Covered Group*

  Employee/ Retiree Only Employee/ Retiree Plus Spouse Family Average Increase From 2006

Active employees





Retirees under age 65





Medicare-eligible retirees





*Data show average rates across all plan types (PPO, HMO, POS, etc.)

The total cost for retirees under age 65 is the highest in the Towers Perrin survey — $589 per month for retiree-only coverage ($7,068 annually), and more for coverage that includes dependents.

As in years past, survey results show that employers continue to shoulder most of the burden. Of the total premium increase of $518, employers will see an annual increase of $374 per employee, and employees on average will pay $144 more in 2007.

Looking Beyond the Averages: Huge Cost Differentials Among U.S. Companies

This year’s average cost increase would have been closer to 8.5% were it not for employer efforts to aggressively manage program performance. In fact, the survey data clearly show that a number of companies have succeeded in slowing the upward cost spiral in their own programs and stemming the double-digit cost growth that characterized the late 90s and early 2000s. Notably, however, 19% of the survey respondents — or nearly one in five — are still experiencing increases of 11% or more.

To better understand the factors that contribute to cost variation, the Towers Perrin analysis divides the survey group into three categories — low-cost companies (companies in the lower third, with the lowest premium level per employee), average cost (the middle third) and high-cost companies (the upper third, experiencing the highest cost per employee).

Summarized in Exhibit 3, the spread between high and low costs can have significant implications. For example, this year’s survey shows that the per-employee cost variation between similar companies is about $3,000 for 2007 and this cost difference is likely to grow in the future. If two companies with 10,000 employees are at opposite ends of the cost spectrum, one will pay $30 million a year more in health care costs than the other, which could significantly impact competitive positioning and profits — or be transferred to employees through reduced raises and merit pay.

Exhibit 3: Cost Variation Across Companies: Top Third vs. Bottom Third


High-Cost Companies

Low-Cost Companies

Cost per employee per year



Increase in employer cost



Increase in employee cost



“The significant variation in health care costs among companies that are otherwise quite similar not only highlights the need for active management of benefit programs, but also quantifies the tremendous toll that an inefficient health benefit program can take on a business’s profitability and its competitiveness,” noted Guilmette.

“There’s no doubt that employers continue to have to row upstream,” he added. “And while the current may not be as strong now as it was a few years ago, it will still push companies back if they don�t keep pushing hard enough against it. As evidenced by their commitment to active management strategies, what�s notable about the low-cost companies is that they never let themselves drift with the flow, and that push-back is translating into millions in savings.”

Contrary to popular belief, low-cost companies are not simply shifting costs to contain costs. In fact, the survey data show that employees at low-cost companies tend to pay less than employees at high-cost companies — approximately $1,728 per year on average versus the $1,884 employees at high-cost companies will pay in 2007.

One other characteristic that unites all low-cost companies is their willingness to be decisive and take action when needed. Nearly half of low-cost companies (46%) identified themselves as either “early adopters” or “fast followers” in describing their organizations’ approach to health benefits, while over two-thirds (69%) of high-cost companies identified themselves as “middle of the pack” or “wait and see.”

Looking more closely at what distinguishes the high and low groups, the survey identifies a number of specific steps that low-cost companies are taking to actively manage their health programs. These steps suggest a significant strategic shift among leading employers that are moving away from individual cost-containment �fixes� toward a holistic approach that aims to create a �culture of health� for the organization, encompassing both employer and employee actions and accountabilities for responsible health management.

In brief, the low-cost companies define “consumerism” in broad terms that extend far beyond benefit plan design. For example, our data show that nearly two-thirds (63%) of the low-cost companies either have implemented a consumer-driven health plan (CDHP) or will implement one in 2007 versus 38% of the high-cost companies. But this contrast between the two groups is just one of many that touch on every aspect of the health program, from vendor management to consumer engagement strategies.

What Successful Companies Do Differently

Companies with lower costs show a deep commitment to managing their programs in ways that benefit both the company and employees. Specifically, these companies:

  • Have a clear focus and a strategic framework for their benefit program

  • Identify problems and opportunities by understanding the current state of their benefit program and the health care system overall

  • Pursue more extensive solutions, including those that address the underlying causes of health care cost increases.

Following are selected examples. (See also the exhibits accompanying this press release.)

  • Focus and framework — Over half of the low-cost companies have written objectives for health care benefits (versus just over a third of high-cost companies) and set measurable targets. For example, low-cost companies are twice as likely as high-cost companies to set expense targets for their cost-sharing provisions.

  • Understanding the current state — The vast majority of low-cost companies (79%) extensively measure program costs versus less than half (48%) of the high-cost group, and are twice as likely to use extensive health care utilization metrics than their high-cost counterparts. Low-cost companies are also more likely to do at least some measurement of health status/risks across the population (76% versus 47%).

  • Extensive solutions targeting underlying causes — Low-cost companies design their programs to make the true costs of care visible to employees, and hold them accountable for the decisions they make at the point of care. Example: There is a significant trend away from copays to coinsurance among low-cost companies (68% versus 33%).

Low-cost companies invest in health by providing programs and resources that encourage employees to understand and manage their health risks and conditions. Example: Low-cost companies offer a variety of health management programs such as those focused on health improvement (83% versus 58%) and disease management (84% versus 61%).

Low-cost companies require employees to be more accountable for their decisions, and also take steps to help employees do that by expanding communication initiatives and providing a variety of tools and resources to support employee awareness, understanding and action. Example: Low-cost companies are much more likely to focus communication and education on defining what it means to be a better health care consumer and how employees can benefit (73% versus 38%).

“Most of the companies in the survey have demonstrated commitment to ensuring their employees have coverage,” said Guilmette. “But as the cost increases, they are increasingly asking their employees to become more accountable for their health care consumption and participate in cost-control initiatives. At the same time, however, they’re also committed to providing the tools and resources employees need to participate with their employer in controlling health care costs.”

Stressing the System: The Pending Crisis in Health Care Affordability

The survey data suggest that the general trend toward greater sharing of the financial burden between employers and employees is not losing steam. In flat-dollar terms, the employee share in 2007 — an average of $72 a month ($864 annually) for employee-only coverage and $242 a month ($2,904 annually) for family coverage — represents a significant cost for all employees and a potentially prohibitive cost for some workers (Exhibit 4).

Clearly, employees with relatively low salaries are particularly vulnerable to the high cost of health care. As an example, for an individual working 40 hours per week at minimum wage, next year’s average total health care premium (including both employer and employee share) will represent 80% of that individual�s total annual earnings.

Retirees, meanwhile, will contribute well over half (56%) of the total cost of their coverage, with retirees age 65 and over paying an average of $119 a month ($1,428 annually) for retiree-only coverage. Retirees under 65 will be hardest hit by cost increases in 2007, and will pay an average of $298 a month ($3,576 annually) for retiree-only coverage.

While many companies are taking steps to help their employees manage the growing costs, the fact remains that year-after-year employee contribution increases are taking their toll on employees. As a result, employers are becoming increasingly concerned about growing numbers of active employees who are opting out of coverage entirely.

“At present, low-wage workers and retirees under age 65 are the ones being hardest hit by the cost increases. But the mere fact that working people are getting priced out of the health care system entirely is a trend with tremendous import for the nation as a whole and one that must be addressed by public and private sectors alike,” said Guilmette. “Contrary to conventional wisdom, having uninsured employees is not a good thing for employers, and can lead to significant losses in productivity.

“In light of this trend, it is heartening to see that the proactive steps forward-thinking companies are taking to manage costs are truly having an impact. Even more promising is how these companies are achieving this goal,” said Guilmette. “While they’re certainly requiring their employees to be more accountable in the health care decision and consumption process, they’re also, significantly, encouraging their employees to be more committed to achieving or maintaining their own health. These companies are doing more than just facilitating a culture of responsibility — they’re supporting the creation of a culture of health.”

About the Survey

The Towers Perrin 2007 Health Care Cost Survey was conducted during August 2006 and September 2006. Participants were asked to report their 2007 per-capita premium costs for insured health and dental plans, and premium equivalents (i.e., estimated benefit and administrative costs) for self-insured plans.Survey respondents represent primarily Fortune 1000 companies with operations in numerous locations nationwide. Health benefits for the 167 participating companies cost more than $15 billion annually.

About TowersPerrin

Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. Through its HR Services business, Towers Perrin provides global human resource consulting and administration services that help organizations effectively manage their investment in people. Areas of focus include employee benefits, compensation, communication, change management, employee research and the delivery of HR services. The firm�s other businesses are Reinsurance, which provides reinsurance intermediary services, and Tillinghast, which provides management and actuarial consulting to the financial services industry. Together these businesses have offices and business partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information about Towers Perrin is available at