Churning river, the fisherman wins… colombian proverb
In times of upheaval and uncertainty, opportunity and risk alike multiply. But it’s the organization that sails slow and steady through the churning waters that gets safely to port. The Patient Protection and Affordable Care Act (ACA) has certainly roiled the seas of health insurance for everyone from employer to employee to insurer. But as with any systemic change, the storm typically comes before the calm.
A March 2015 study from the International Foundation of Employee Benefit Plans (IFEBP) reconfirms what we have known to be true for some time: employers offer healthcare coverage to employees for three primary reasons: to retain their current personnel, attract future employees, and maintain employee satisfaction and loyalty.
But healthcare coverage is becoming increasingly expensive for all parties involved: the employer, the employee, and the insurer. According to numerous media reports, health insurance companies throughout the United States are responding to the ACA with plans to increase premiums at double-digit rates in 2016 and beyond. Employers in turn face not just these increases in their health plans but also the increased administrative costs of fulfilling the regulatory requirements of the ACA.
Let’s drill down into the drivers of these cost increases and what employers and insurers are doing to mitigate them.
Why employer health plan costs are increasing
As we said in one of last month’s articles , “Braving the Perfect Storm”, employers need to be able to distinguish themselves from competition, and one of the top benefits valued by employees, current and prospective alike, is health insurance. Although the growth rate of the annual medical cost for families was just 5.4% in 2014 compared to 10% in 2005, it has pushed up to 6.3% this year, due largely to rising prescription costs, and the overall medical costs for an average family in the U.S. have more than doubled in the last ten years.
But offering attractive health benefits is becoming increasingly difficult, especially for the small employer. According to the 2015 Milliman Medical Index, the total employer costs for employee healthcare benefits increased by 32% in the last five years. The continually swelling costs of health care premiums are now compounded by several provisions in the ACA, most notably the so-called Cadillac tax, an excise tax on high-cost, large group health plans. Although most employers surveyed by the Milliman Medical Index report that the ACA is a minor rather than a major cost driver for them, the IFEBP study states that a few other ACA provisions are likely to contribute to increased employer costs, such as the administrative costs associated with ACA reporting, disclosure and notification requirements.
What employers are doing to control their health plan costs
More and more employers are taking action to avoid triggering the Cadillac tax and to mitigate costs related to ACA compliance. Over one in ten organizations surveyed by the IFEBP have already taken steps to avoid the tax, 21 percent are working on changes, and 28 percent are planning on taking action before 2018.
Other ways employers are considering to manage their costs include what we call positive and negative approaches:
– Encouraging employees to be responsible for and understand the importance of their personal health and lifestyle
– Introducing or expanding healthy lifestyle activities and programs that improve employee health and productivity
– Employing financial incentives to reward healthy lifestyle and behavior changes
– Adopting new tools and technologies to educate and engage employees in their health and their health care plans
– Exploring alternative delivery channels such as private and public exchanges or hybrid arrangements
– Using more account-based health plans (ABHPs), namely flexible spending and health savings accounts
We’d like to note that the first five of the above six points are considered to be the strategies used by top performers according to the Towers Watson study. “Top performers” are defined as companies that can expect to pay significantly less per employee for health care and derive high performance benefits.
Negative approaches (cost containment)
– Increase out-of-pocket limits and in-network deductibles
– Increase copayments or coinsurance for primary care or prescription drugs
– Eliminate subsidies for spousal coverage (but still offer access)
– Increase employee contributions for dependents
– Require spouses to purchase health insurance through their own employer
– Implement spousal surcharges when other coverage is available
– Adjust employee hours to have fewer full-time employees who qualify for health insurance
All this effort to cut costs shares one bottom line for employers: health care coverage for active full-time employees remains a critical part of their benefits packages.
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.