Employers Expect Health Benefit Costs to Rise

October 1, 2013 (PLANSPONSOR.com) – Employers expect health benefit cost per employee will rise by 4.8% on average in 2014, an annual survey from Mercer found.

Mercer also reported that cost growth slowed to 4.1% in 2012, a 15-year low. The projected increase for 2014, while still relatively low, represents a slight rise in the rate of growth.

“The recession has been one factor behind slower cost growth, by dampening utilization,” said Beth Umland, Mercer’s director of research for health and benefits. “But employers have made fundamental changes in their health benefit programs in recent years that have put the brakes on unsustainable cost growth.”

According to the survey, one of the key strategies employers are using to manage cost growth is implementing consumer-directed health plans, which give employees financial incentives and information resources to seek more cost-effective care and are typically paired with an employee-controlled health savings account.

Another is health management (or “wellness”) programs focused on improving work force health. And an emerging trend for 2014 that is expected to accelerate in 2015 is the use of private exchanges.

Problems Ahead?

That’s the good news, said Tracy Watts, senior partner and Mercer’s leader for health reform. “But for some employers at least, slower growth in the cost of coverage will be overshadowed by additional costs from higher enrollment and fees.”

Mercer found about one-third of all large employer health plan sponsors (those with 500 or more employees) do not currently offer coverage to all employees working 30 or more hours per week, as will be required under the Patient Protection and Affordable Care Act (or ACA) beginning in 2015. Industries that rely heavily on part-time workers will be the hardest hit by this rule. About half of respondents in retail and hospitality currently do not offer coverage to all employees working 30 or more hours per week.

Some employers will minimize the number of newly eligible employees by cutting back on hours for at least a portion of their work force—11% of all large employers say they will do so. But most employers affected by the rule will simply open their plans to all employees working 30 or more hours per week and brace for rising enrollment.

In addition, next year all individuals will be required to have health coverage or face a tax penalty. Because of this, employers may see fewer employees choosing to waive coverage. Currently, an average 16% of eligible employees at organizations with 500 or more employees waive coverage for themselves.

When asked to consider the impact of higher enrollment and new fees (such as the reinsurance fee of $63 per covered employee), about half of the employers surveyed say they will spend at least 2% more on health benefits in 2014, which is over and above the normal increase in cost. Another one-third are unable to predict. Only about one-fifth of employers are confident that the ACA will have little or no impact on spending in 2014.

“Rising enrollment will be an even bigger issue in 2015 when the shared responsibility penalty goes into effect,” said Watts. “While some employers are going ahead with plans to expand eligibility in 2014 despite the delay, most of those with the big part-time populations are holding off and will feel the pinch in 2015.”

Most Employers Not Dropping Their Health Plans

According to Mercer, just 5% of large employers said it was likely they would terminate their health plans within the next five years, even though public insurance exchanges will provide another source of health coverage. About a fifth of employers with fewer than 200 employees said it’s likely they will terminate their plans, as employers of this size are much less likely to offer coverage to begin with.

“Success in controlling health plan cost growth in recent years may be contributing to employers’ commitment to providing health coverage,” said Watts. “But looking ahead, they’re very concerned about the excise tax in 2018.”

Under the ACA, beginning in 2018 employers will pay a 40% tax on the cost of health coverage in excess of $10,200 for an individual or $27,500 for a family. “This tax has been dubbed the ‘Cadillac tax’ but that’s really a misnomer,” said Watts. “Health coverage can often be expensive without being overly generous.”

Based on cost data collected in 2011, Mercer estimated that about 40% of employers would have to pay the tax on at least one plan if they made no changes to current plan design. Nearly a third of all large employers say they are taking steps in 2014 to avoid the tax in 2018—in many cases, by adding a high-deductible consumer-directed health plan or taking steps to increase enrollment in an existing plan.

The survey findings are preliminary ones from Mercer’s National Survey of Employer-Sponsored Health Plans 2013. Complete results will be released by the end of the year. The preliminary results are based on about 2,000 employers who responded by September 10. Ultimately, around 2,800 employers are expected to participate in the survey.