Despite a tight labor market, more employers backed into a corner by out-of-control health care costs say they will be forced to pass these costs on to their workers, according to a new study.

Forty percent of the 3,300 public and private employers surveyed in the "Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans" released Dec. 12, 2000, say they intend to increase employee contributions to health plans in 2001, up from 21 percent who said so a year ago.

The survey, conducted by human resource consulting giant William M. Mercer Inc., is statistically weighted to represent nearly 600,000 employers and more than 90 million full and part-time employees.

According to Mercer, there are three main factors fueling the sharp increase in the number of employers who say they plan to increase their workers' health care contributions:

• The average annual cost of health insurance per employee rose 8.1 percent in 2000 to $4,430, up from $4,097 in 1999.
• Health insurance premiums are projected to rise another 11 percent in 2001.
• Prescription drug costs rose an average of 17.5 percent in 2000, up from an increase of 15.2 percent a year ago.

Although employers were reluctant in the past to raise their workers' contributions to health care, many say they no longer have a choice.

"Attraction and retention of employees is still a big issue," says Blaine Bos, one of the study's authors. "But in companies where shareholder demands and the pressures of global competition are driving the bus, controlling runaway expenses take priority."

Significant drop in retiree health benefits

As employers scrambled for ways to curb health care costs, more of them dropped health insurance for their retirees in 2000, the survey shows. The number of employers offering health coverage to pre-Medicare-eligible retirees dipped to 31 percent, down from 35 percent a year ago. The number offering benefits for Medicare-eligible workers fell to 24 percent from 28 percent a year ago. For more information on early retirement health care coverage, read Health insurance options for retirees.

Employers report that over the past two years, the cost of covering a pre-Medicare-eligible retiree rose 10.6 percent to $5,537 per retiree, and the cost of covering a Medicare-eligible retiree rose to $2,319. Mercer says the increase for Medicare-eligible retirees closely follows the increase in prescription drug costs. Medicare does not cover prescription drugs. According to Mercer, many retiree medical plans are designed to fill the gap.

While it's likely this trend will continue, Bos warned there's a downside to not offering retiree coverage. "Without a retiree medical plan, employees wait longer to retire — which may delay career advancement for younger employees," he says. "And those employers trying to attract experienced, mid-career employees may find the lack of retiree coverage hurts them."

According to the survey, the median retirement age is 61 in organizations that offer retiree coverage to pre-Medicare-eligible retirees and 64 in organizations that don't.