Growth in the average total health benefit cost per employee in the U.S., which had slowed to 5.5 percent in 2009, picked up steam in 2010, rising 6.9 percent to $9,562, the biggest increase since 2004, according to the 2010 National Survey of Employer-Sponsored Health Plans by consulting firm Mercer. Health benefit cost rose three times faster than the U.S. consumer price index in 2010.
Employers are expecting high cost increases again in 2011. They predicted that cost would rise by about 10 percent if they made no health program changes, with roughly 2 percentage points of this increase coming from changes mandated by the Patient Protection and Affordable Care Act (PPACA) for 2011. However, employers expect to hold their cost increase to 6.4 percent by making changes to plan design or changing plan vendors (click to view Figure 1).
Mercer’s survey was conducted in late summer 2010 using a national probability sample of U.S. public and private organizations with 10 or more employees. More than 2,800 employers completed the survey.
“Employers did a little bit of everything to hold down cost increases in 2010,” said Beth Umland, Mercer’s director of health and benefits research. The average individual preferred provider organization (PPO) deductible rose by about $100 (click to view Figure 2), she said. Among the key trends noted:
• Employers dropped health maintenance organizations (HMOs), which were more costly than PPOs in 2010.
• Large employers added low-cost consumer-directed health plans (CDHPs) and found ways to encourage more employees to enroll in them—increasingly dropping all other plan options.
• More employers provided employees with financial incentives to take better care of their health.
Large Employers Saw Steeper Increase
Large employers experienced a sharper cost increase than small employers in 2010. Cost rose by 8.5 percent among employers with 500 or more employees but by just 4.4 percent among those with 10-499 employees (click to view Figure 3).
“Large employers may have been taken by surprise by the uptick in the cost increase” in 2010, said Susan Connolly, a partner in Mercer’s Boston office. “In last year’s survey, they predicted cost would rise by less than 6 percent. Higher prices for health care services seem to be part of the equation, but if the recession caused a slowdown in utilization last year, we may also be seeing the effect of employees getting care they’ve been putting off.”
Large employers most often are self-insured, which means that they pay the cost of claims as they are incurred. If use of health benefits is higher than expected or the price of health care services rises, actual cost could exceed predicted cost, Connolly noted. Small employers typically offer fully insured plans, in which premium cost is fixed in advance.
Rise in Consumer-Directed Plans
Enrollment in high-deductible, account-based consumer-directed health plans (CDHPs) jumped from 9 percent of all covered employees in 2009 to 11 percent in 2010. CDHP enrollment has risen by 2 percentage points each year since 2006 (click to view Figure 4).
CDHP enrollment rose fastest in 2010 among the largest U.S. employers, those with 20,000 or more employees—a group that tends to set trends for other employers. Just over half of these employers offered a CDHP in 2010—51 percent, up sharply from 43 percent in 2009. Employee enrollment in CDHPs rose even faster, swelling from 9 percent to 15 percent of covered employees (click to view Figure 5).
Among all employers, Mercer found that the per-employee cost of PPOs was $8,781 in 2010 vs. $8,892 for HMOs and $6,759 for high-deductible CDHPs with health savings accounts (HSAs), which includes employer contributions to employees' HSAs.
With the cost of HSA-based CDHP coverage per employee almost 25 percent lower than the cost of PPO coverage, the appeal of these plans to employers becomes clear (click to view Figure 6).
“As both employers and employees become more comfortable with high-deductible plans, we’re seeing more organizations willing to commit to the consumerism concept,” said Connolly. “Over the past few years employers have worked on finding a balance between giving employees more responsibility for their health care spending and providing the incentives, resources and support to help them succeed.”
Communication appears to be an important component of success reducing costs with CDHPs. The employers that engage in the most extensive communication efforts aimed at encouraging health-conscious behaviors report higher levels of employee satisfaction.
Among HSA sponsors with “very extensive” employee communications, 46 percent said employee response to the plan has been “strongly positive,” compared to 25 percent of those that make little or no effort with communication.
As HMO costs rose, employers moved to other options. HMO enrollment peaked in 2001 at 33 percent and has been eroding ever since, sliding from 21 percent to 19 percent of all covered employees in 2010.
“The movement out of HMOs and into PPOs has been going on for nearly a decade, largely because PPOs offer employers more flexibility in sharing cost with members,” said Umland. “Now the growth is in consumer-directed health plans, in which high deductibles are made more palatable with an account that allows employees to accumulate health care dollars by using health services more wisely.”
HMOs remain more popular in the Northeast and West regions, where they are offered by 44 percent and 33 percent of employers, respectively.
Focus on Wellness with Incentives
Already committed to employee health management, employers are adding financial incentives to build participation. Employers will soon be more limited in how they can shift cost to employees. Starting in 2014, the PPACA sets minimum standards for “plan value” (the percentage of health care expenses paid by the plan) and “affordability” (the employee’s share of the premium relative to household income). These changes are bringing greater focus on improving workforce health as a way to control health benefit cost.
Over the past decade U.S. employers have been adding a wide range of programs under the employee health management or “wellness” umbrella, including:
• Health risk assessments (offered by 69 percent of large employers in 2010).
• Disease management programs (73 percent).
• Behavior modification programs (50 percent).
Results are encouraging: For the second year in a row, medical plan cost increases in 2010 were about 2 percentage points lower, on average, among employers with extensive health management programs than among those employers offering limited or no health management programs.
But cost savings are possible only if employees choose to participate in the programs, so in 2010 more employers added incentives or penalties to encourage higher participation rates: 27 percent of large employers with health management programs provided incentives, up from 21 percent in 2009 (click to view Figure 7).
In addition, the incentives are becoming more substantial. Just a few years ago, a token gift like a hat or water bottle was the most common incentive for completing a health risk assessment; in 2010 it was cash (typically $75) or a lower premium contribution (typically a reduction of $180).
Nearly two-thirds of employers that have measured the return on their investment in health management programs said they were satisfied with the year-over-year savings, lower utilization rates or improved health risks.
In addition, very large employers were increasingly willing to reward employees who demonstrated responsibility for their health. More than a fourth (28 percent) of those with 20,000 or more employees required lower premium contributions from nonsmokers in 2010, up from 23 percent in 2009. An additional 6 percent provided other incentives to nonsmokers (click to view Figure 8).
“As employers see tangible evidence that health management can bend medical trend and contribute to a more productive workforce, they’re more willing to spend money to get their people into the program,” said Connolly. “And because PPACA allows employers to use much larger incentives than we typically see, there’s still plenty of room to raise the bar on rewarding behavior change.” (To learn more, see the SHRM Online article "Wellness Programs Get a Boost in Health Reform Law.")
Falloff in Retiree Plans
Employers continued to drop retiree medical plans in favor of subsidizing individual coverage in 2010.The prevalence of retiree medical plans slid to its lowest point ever in 2010, with just 25 percent of large employers offering a plan to retirees under age 65 (down from 28 percent in 2009) and just 19 percent offering a plan to Medicare-eligible employees (down from 21 percent).
Even among the largest organizations, where retiree medical plans were once nearly universal, just 46 percent and 38 percent of employers, respectively, provide coverage to retirees under age 65 and those 65 and older.
Some employers that stopped offering a plan on a continuing basis (a plan for which new hires are eligible) continued to offer coverage to employees retiring or hired after a specific date; an additional 10 percent of all large employers offer coverage to such a closed group.
A diminished tax break for employers who provide retiree drug plans and the expected availability of better Medicare coverage as the government shrinks the so-called "doughnut hole" gap in prescription drug coverage are among the factors that have employers reexamining their retiree health programs.
As some employers take the step of terminating group coverage for retirees, they are softening the blow with a subsidy to help pay for individual coverage. Nearly one in 10 of the largest employers (those with 20,000 or more employees) provided such a subsidy in lieu of a group plan in 2010.
Stephen Miller is an online editor/manager for SHRM.
Open Enrollment Brings Higher Premiums, Plan Design Changes SHRM Online Benefits Discipline, October 2010
Rethinking Health Care Strategy in the Age of Reform, SHRM Online Benefits Discipline, October 2010
Future Bright for Health Savings Accounts, Says Policy Analyst, SHRM Online Benefits Discipline, September 2010
Managing Costs, Health Reform, Are Top Benefits Priorities, SHRM Online Benefits Discipline, June 2010
Steps to Hold Down Health Reform's Cost Increases, SHRM Online Benefits Discipline, September 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page