In geography, one of the terms they use to describe a series of cataclysmic events is called “the perfect storm.” Merriam-Webster defines a perfect storm as a “critical or disastrous situation created by a powerful concurrence of factors”. If you are an employer seeking to become a best-in-class company, you are in for a perfect storm.
Health insurance benefits have become a necessary form of compensation for many years. It is pivotal in retaining and recruiting employees. Companies can differentiate themselves by their culture and we see this pattern in many forms today, from gourmet foods to concierge services. But foundational to employing great people and keeping an edge over the competition is what kind of benefits you offer. A company can offer a great culture but if it doesn’t provide benefits, it isn’t likely to be able to compete for top talent.
At the same time, health insurance premiums have become exorbitant. According to the 2014 Kaiser Family Foundation Employer Health Benefits Survey, average annual premiums for a single employee amounted to $6,217 and $17,333 for families. To put things into perspective, the December 2014 USDA report states the average cost to feed a family consisting of two adults for one year is $5,977. For $17,400, one can purchase a 2014 Toyota Corolla at the MSRP. What is a little daunting is the fact since the Kaiser Family Foundation began measuring health insurance costs in 1999, not one year have premiums declined.
To increase the problem, the ACA requires employers 1) to provide coverage that meets minimum requirements (which means you can can’t offer plans below their threshold to save money), 2) to charge employees no more than 9.5% of their annual income (which means you may have to increase the amount you pay for employees premiums), and 3) to provide coverage to at least 95% of your workforce (which means you may have to increase the number of people you cover).
For added measure, as premiums increase each year, in 2018, the excise tax (also affectionately known as the Cadillac Tax) is scheduled to come into play, charging an employer a whopping 40%, non-deductible tax for premiums that exceed $10,200 for single employees and $27,500 for families.
This is the perfect storm that is coming: continued rising costs that are inherent in the health economics pricing system, regulatory pressure that promotes increases in premiums through minimum plan design and maximum participation, and tax ramifications for plans that exceed a pricing threshold.
The figures previously illustrated from the Kaiser Family Foundation are averages for the entire nation. For those employers who have employees in some of the most expensive states to purchase health insurance (California, New York, Texas), they would likely be subject to the excise tax if it were implemented today.
A fun book to read is “The Complete Worst-Case Scenario Survival Handbook”. It gives instructions for how to survive life threatening events and disasters, like how to survive a snake bite, how to avoid the perils of mountain lions, or how to survive an alien invasion. In the event of the perfect storm described above, employers are going to have to take some drastic measures.
First: To survive the perfect storm, employers are going to have to lower the cost of insuring an employee. Insurance carriers look at a risk and determine what the cost is going to be to insure that risk. In a very simple world, the calculation of that risk is going to include mortality, demographics, and the cost of reimbursing medical providers that will be used by the membership. Using our figures above from the Kaiser Family Foundation, the average cost of insuring a single employee is $6,217 for 2014. This figure is actually $6,217 x (1+trend+ACA taxes)n , where n is the number of years projected past 2014, because history shows that health insurance costs have always gone up, not down. And the passing of the Affordable Care Act has also increased costs through additional taxes. If your plan is fully insured, you can currently expect trend to be 7% and have ACA taxes at 3.6%. This means on average, an employer should be budgeting a 10.6% increase annually for their health insurance plan! This is assuming that your plan, if fully credible, meets the target loss ratio of the insurance carrier.
The only way to lower your costs then is to lower your cost basis. If the insurance carrier has a target loss ratio of 80% and your company comes in at the target, you can be assured of the 10.6% increase. So in order to get a 0% renewal, your loss ratio must come in just slightly under 70%.
Another way of stating this is that instead of having each employee cost $6,217 to insure for year 1, you will have to find a way of getting your employees to be a risk that is worth insuring at a lower rate. At $6,217, the insurance company is betting that your employee will incur claims at 80%, which equates to $4,974. If this holds true, medical trend plus ACA taxes will increase the total premium to $6,876 for year two. But if you can get your risk to be worth 70 cents on the dollar at $4,352, then your renewal ends up being 0%.
Second: In order to reduce the cost basis, employers are going to have to curb utilization. There are two primary ways of doing this. The first is cost shifting by finding the right dollar amount in deductibles, coinsurance, and copayments so that employees pay a proportionate amount that will almost guarantee a lower utilization rate. This has its limitations due to a competitive environment for talent as well as the inflexibility of the ACA. The better alternative is to manage the health of the employee. It seems to be very sensible that a healthy employee costs less to insure than an unhealthy employee. In the words of our friend, Dee Edington, for those who are already healthy, it is going to be important to find ways of keeping them healthy. For those who are not healthy, employers are going to have to find ways of seeing that these people don’t get worse. This is just for starters.
Lastly: In order to manage the health of the workforce, employers are going to have to proactively utilize evidence based tools and programs. Lifestyle management or wellness programs have proven time and time again that their efficacy remains low. Not everyone can run a marathon, play softball, or go zorbing. Walking programs are great but walking alone will not significantly improve the health of your employee population.
Prevention, disease management, and education programs that touch people at various stages of change, however, are proven to work. The largest and most sophisticated employers that we have collaborated with all manage the health of their employees and all have insurance premiums that increase at a much lower rate than the average.
If you continue doing what you’re doing to manage cost, what will the outcome be for your next renewal?
Alan Wang is the President of UBF and serves as the lead consultant. He has delivered the UBF solution set throughout the world and is highly regarded for his areas of expertise. You can follow him on Twitter @UBFconsulting.