Employers Anticipate Cost Pressures From Health Reform

November 20, 2013 (PLANSPONSOR.com) – While the average cost per employee for health benefits slowed this year, employers do not expect this trend to continue.

The National Survey of Employer-Sponsored Health Plans, conducted annually by consulting firm Mercer, finds that slower cost growth continued in 2013, with employers taking action in anticipation of new cost pressures that will arise over the next few years due to health care reform provisions. The survey shows that growth in the average total health benefit cost per employee slowed from 4.1% in 2012 to just 2.1% this year, when the cost averaged $10,779. This includes employer and employee contributions for medical, dental and other health coverage.

Employers expect the rate of growth to increase in 2014 to 5.2%. The survey results indicate this increase reflects changes employers will make to reduce costs. If no changes are made to current plans, employers estimate costs will increase by an average of 8%.

While cost growth has slowed among employers of all sizes, it was lowest for small employers in 2013. Among those with 10 to 499 employees, average cost rose by only about 1%, while among very large employers—those with 5,000 or more employees—it rose 3.7%. Small employers shifted cost to employees this year with higher deductibles, which helped to hold down cost. The average PPO [preferred provider organization] in-network individual deductible jumped 15% since last year to reach $1,663. Large employers focused on building enrollment in low-cost, consumer-directed health plans and improving employee health management programs.

“The good news is that employers have already taken decisive action to slow cost growth so they will be in a better position to handle the challenges ahead,” says Julio A. Portalatin, president and CEO of Mercer. “But the impact of the ACA [Patient Protection and Affordable Care Act] on enrollment levels remains a huge question mark.”

Higher Enrollment and Benefit Spending

Many employers anticipate spending more to cover more employees in 2014, when the ACA mandate requiring all individuals to obtain coverage or face a tax penalty goes into effect. Currently, 22% of an employer’s eligible employees waive coverage for themselves, either because they are covered under another plan or because they choose to go without. Among employees who do enroll, 53% elect dependent coverage. But in 2014, because of the individual mandate, the survey results show that likely fewer employees will waive coverage for themselves and more will elect dependent coverage.

Some large employers say they will take steps to control growth in enrollment, most commonly by increasing the employee contribution for dependent coverage (18%) or employee-only coverage (10%). Some already impose a surcharge on premium contributions for spouses who have other coverage available (9% of large employers) or even make them ineligible for coverage (7% of large employers). The survey authors indicate that these provisions likely will become more common next year.

“There are a lot of unknowns when it comes to enrollment,” says Tracy Watts, Mercer’s national leader for health reform. “A big question is how many employees will enroll for the first time, given that the tax penalty for not obtaining coverage is relatively small. But an employer might wind up covering more dependents if others in the area have made changes to discourage their employees from enrolling dependents.”

The majority of large employers believe higher enrollments and new fees will boost their benefit spending in 2014. The median amount of the increase predicted is 3.5%, although some employers (13%) expect their spending on health benefits to increase by more than 10%.

“Cost increases from higher enrollment would be on top of the normal increase in the per-employee cost of coverage,” adds Watts.

Enrollment in Consumer-Directed Health Plans (CDHPs)

The survey results show that, nationally, enrollment in CDHPs rose from 16% of covered employees in 2012 to 18% in 2013. This is the same portion that enrolled in HMOs [health maintenance organizations]. In the Midwest region in particular, CDHP enrollment is now more than double that of HMOs (27% compared with 10%).

The survey authors suggest that CDHPs are an important option for employers looking for a low-cost plan to make extending coverage to additional employees more affordable. The average cost of coverage in a CDHP paired with a tax-advantaged health savings account is 17% less than coverage in a PPO and 20% less than in an HMO. It is $8,482 per employee, compared with $10,196 for PPOs and $10,612 for HMOs.

CDHPs are expected to be a key strategy for employers that need to find a way to lower costs in 2018, when they will be required to pay a 40% excise tax on health coverage that costs more than $10,200 for an individual or $27,500 for a family. Mercer estimates that about one-third of employers are currently at risk for triggering the excise tax in 2018 if they make no changes to their most costly plan. Nearly two-thirds of all large employers, and about one-third of small employers, say they expect to offer a CDHP within three years.

Health Management and Controlling Spending

Work force health management, or “wellness,” is one of employers’ top strategies for controlling health spending, according to Mercer. While most employers believe health management programs are making a difference, proving a return on investment (ROI) remains a challenge for many. The largest employers are those most likely to have formally measured the ROI of their health management programs—46% of employers with 20,000 or more employees have done so. Nearly nine out of 10 of these employers say their programs have had a positive impact on medical plan trends.

The survey found that employers are increasingly willing to invest in the success of these programs. Fifty-two percent of large employers with health management programs now use financial incentives to encourage higher participation. This is up from 48% in 2012 and 33% in 2011. Among employers that offer lower premium contributions to employees completing a health assessment, the median reduction in the annual contribution required for employee-only coverage is $250. Further, a growing number of employers provide incentives for achieving desired outcomes, instead of or in addition to incentives for participating in programs. This year, 20% of large employers use outcomes-based incentives, up from 18% in 2012.

Other Findings

This year, few large employers—just 6% of those with 500 or more employees—say it is likely they will terminate their employee health plans within the next five years and send employees to the public health insurance exchanges. This is consistent with results from Mercer’s past four annual surveys. But the portion of small employers that say they likely will terminate their plans within that time frame rose from 22% last year to 31%.

The survey also found that:

  • In 2015, employers with 50 or more workers will be required to extend coverage to all employees working 30 or more hours per week. About one-third of all large employers (500 or more employees) will be affected by this rule (32%), and, among wholesale/retail organizations, which have large part-time populations, nearly half will be affected (48%).
  • Fifty-five percent of all employers now include same-sex domestic partners as eligible dependents. This varies significantly based on geographic region—from 71% of employers in the Northeast to 38% in the Midwest.
  • Sixteen percent of large employers have special provisions concerning coverage for spouses with other coverage available, up from 12% in 2012. Most common is to impose a surcharge (9%), but 7% provide no coverage at all.
  • Twenty-three percent of large employers (up from 19% in 2012) vary the employee contribution amount based on tobacco-use status or provide other incentives to encourage employees not to use tobacco. Among employers with 20,000 or more employees, 46% now use an incentive.
  • Twenty-two percent of large employers offer an ongoing plan to retirees younger than age 65, down from 24%, and just 17% offer a plan to Medicare-eligible employees (unchanged from 2012).

The survey queried public and private employers with at least 10 employees, with results representing about 800,000 employers and more than 105 million full- and part-time employees. A full report on the survey results is scheduled to be published in April 2014.

More information about the survey can be found here.