Employers Hold Back Health Benefit Costs

November 14, 2012 (PLANSPONSOR.com) Growth in the average total health benefit cost per employee slowed from 6.1% last year to just 4.1% in 2012.

According to the National Survey of Employer-Sponsored Health Plans, conducted annually by Mercer, decisive action by employers in 2012in particular, moving more employees into low-cost consumer-directed health plans (CDHPs) and beefing up health management programswas rewarded with the lowest average annual cost increase since 1997. Cost averaged $10,558 per employee in 2012. Large employers (those with 500 or more employees) experienced both a higher increase (5.4%) and higher average cost. 

Success in controlling cost growth in recent years may be contributing to employers’ commitment to providing health coverage. Few believe it is likely that they will terminate their employee health plans within the next five years, even though state-based health insurance exchanges will provide another source of health coverage for individuals beginning in 2014. Just 7% of large employers and 22% of small employers (those with 10 to 499 employees) believe it is likely or very likely that they will do so.  

There was a slight uptick in the percentage of employers offering coverage in 2012 from 55% to 59%, after falling in each of the previous two years. Most of the increase was among the smallest employers (those with 10 to 49 employees).  

Employers expect another relatively low increase of 5.0% for 2013. However, this increase reflects changes they plan to make to reduce cost; if they made no changes, cost would rise by an average of 7.4%. 

Cost-Cutting Strategies  

With a growing number of employers now positioning a high-deductible, account-based consumer-directed health plan as their primary planor even their only planemployee enrollment jumped from 13% to 16% of all covered employees in 2012. Many employers see these plans as central to their response to health care reform provisions that will raise enrollment. Over the past two years, offerings of CDHPs have risen from 17% to 22% of all employers, and from 23% to 36% of employers with 500 or more employees. Well over half (59%) of very large organizations (20,000 or more employees), which typically offer employees a choice of medical plans, now offer a CDHP.  

While employers have been reluctant to offer the CDHP as the only medical plan, survey results suggest that attitudes are shifting. When asked if they expect to offer a CDHP five years from now, 18% of large employers say they expect to offer it as the only plan, up from 11% in 2011. Among large employers that offer an HSA-based CDHP, average enrollment rose from 25% to 32%.  

Others simply raised the deductible of an existing PPO plan. The average PPO in-network deductible reached $1,427 for an individual in 2012. Although large employers typically require much lower deductibles, the average deductible amount among employers with 500 or more employees rose by about $80 in 2012, to reach $666. 

"Over the past decade, employers have figured out how to stabilize health benefit cost increases through cost-shifting and other cost management techniques. Now we're seeing a move toward even greater control through defined contribution strategies," said Sharon Cunninghis, U.S. business leader for health and benefits.  

An example of a defined contribution strategy is determining in advance what the employer contribution to the cost of coverage will be, and requiring employees to pay anything above that amount. If the employer offers a range of plans, employees can save money by choosing a lower-cost plan. Nearly half of employers (45%) say they currently use or are considering using a defined contribution strategy.

Future Health Cost Strategies  

With the future of health reform secured by the re-election of President Obama, employers will be focusing on the next generation of cost-management strategies. One approach that is increasingly in the spotlight is the use of private exchanges, a private-sector alternative to the state health insurance exchanges. Private exchanges give employers a way to offer employees a broader choice of benefits while allowing carriers to compete for their business and manage their risk.More than half of all employers (56%) say they would consider a private exchange for either their active or retired employees.  

The changing health care market is presenting employers not only with new ways to purchase health insurance, but with new ways to influence the quality of care that their employees receive.  Among very large employers (5,000 or more employees), the use of high-performance (or "narrow") provider networks rose from 14% to 23% in 2012, while the use of surgical centers of excellence rose from 18% to 35%. There was also strong growth in the use of medical homes (from 3% to 9%), which also promise to save money by improving care.  

"While employers deserve a lot of credit for curbing cost growth in 2012, they know that no one silver bullet will end cost escalation forever," said Tracy Watts, a partner in Mercer's Washington, D.C. office. "Health reform has presented us with a new set of challenges, and we have to keep thinking one step ahead." 

Other findings include:

  • Offerings of retiree medical plans remain stable in 2012: About one-fourth (24%) of large employers offer an ongoing plan to retirees younger than age 65, and just 17% offer a plan to Medicare-eligible employees, essentially unchanged from 2011. An additional 15% have stopped offering a plan for which new hires will be eligible, but continue to offer coverage to a closed group of employees retiring or hired after a specific date. 
  • Domestic partner coverage: Close to half of large employers include same-sex domestic partners as eligible dependents (47%), up from 39% in 2010. This varies significantly based on geographic regions, from 73% of employers in the West to 30% in the South. 
  • Spousal surcharges: Very large employers are adopting special provisions concerning spouses of employees with other coverage available. In 2012, 18% of employers with 5,000 or more employees had such a provision in place, up from 15% in 2011. They either imposed a surcharge for spouses with other coverage available (14%) or denied them coverage entirely (4%). 
  • Tobacco use surcharges: 19% of large employers (up from 17% in 2011) vary the employee contribution amount based on tobacco use status, or provide other incentives to encourage employees not to use tobacco. Growth was especially strong among very large employers: 46% of employers with 20,000 or more employees now use an incentive, up from just 35% in 2011. 
The Mercer National Survey of Employer-Sponsored Health Plans is conducted using a national probability sample of public and private employers with at least 10 employees; 2,809 employers completed the survey in 2012. The survey was conducted during the late summer.