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Employers Brace for Health Care Cost Increases, Remain Committed to Subsidizing Employee Coverage
Retiree medical coverage expected to fall sharply

By Stephen Miller  6/4/2010
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Although U.S. employers view controlling health care costs as their highest health care reform priority, few believe that the Patient Protection and Affordable Care Act will stem the tide of rising costs, according to a May 2010 survey by consultancy Towers Watson. But regardless of expected cost increases, nearly three-quarters of large U.S. employers (74 percent) expect to continue to provide subsidized health care coverage for active employees.

When asked how important specific health care reform goals were to their organization, respondents labeled the following as essential or high priority:

Containing health care costs (96 percent of respondents).

Encouraging healthy lifestyles (88 percent).

Improving the quality of care (75 percent).

Despite these goals, nearly all employers (94 percent) believe that health care reform will raise their organization's costs. Additionally, 61 percent believe that reform will have a minimal effect on encouraging healthier lifestyles, and 73 percent believe that it will have a negative effect or no impact on the quality of care.

Along Similar Lines

In a May 2010 employer survey conducted by consulting firm Mercer, one-fourth of respondents said that compliance with the first round of health reform mandates will add at least another 3 percent to their projected 2011 plan costs, with about one in 10 expecting an additional 5 percent or more (see the SHRM Online article “Employers: Expanded Coverage Will Raise Health Care Costs”).

Health insurer Cigna estimated the cost impact of covering dependents up to age 26 would result in roughly a 1.5 percent to 2 percent increase in premiums above the health care cost trend. If an employer previously offered no paid coverage of preventive care, the requirement to cover these services would add 3 to 4 percent increase to those employers' premiums, Cigna estimates (see the SHRM Online article “Health Reform's Coverage Requirements Expected to Drive Premiums Higher).

"Employers are currently weighing the short-term challenges and long-term opportunities of the new law," said Mark Maselli, North American health and group benefits leader for Towers Watson. "While many employers have not yet assessed the full impact that reform will have on their businesses, they do realize that the responsibility to hold costs down will fall primarily on their shoulders."

In order to cope with expected cost increases, many employers plan to:

Pass on increases to employees (88 percent).

Reduce health benefits and programs (74 percent).

Absorb costs in the business (33 percent).

Pass on increases to customers (20 percent).

At the same time, employers remain committed to many of the initiatives offered prior to health care reform, which were designed to hold the line on rising medical costs and improve employee health. For example, only 12 percent of employers said they would eliminate or reduce their wellness/health promotion programs in the wake of health care reform. In fact, 48 percent of employers believe that reform will increase employer offerings of wellness programs. In addition, employers expect health care reform will increase:

Adoption of total replacement consumer-directed health plans (58 percent).
Note: A consumer-directed health plan (CDHP) has a deductible and is offered with a health savings account (HSA) or health reimbursement arrangement (HRA) that can be used to pay a portion of the medical expense not paid by the plan. A total replacement CDHP means that the entire workforce would have only this plan option.

Transparency of provider prices (37 percent).

Transparency of provider quality ratings (35 percent).

Reform Cost Drivers

Towers Watson's health care reform survey revealed employer perspectives on two significant drivers of health care cost increases: the excise tax on high-cost plans and coverage extensions to employees’ adult children up to age 26.

The primary cost driver that will affect many employers is the implementation of an excise tax cap on high-cost benefit plans. Nearly half (43 percent) of the employers surveyed believe that they will be subject to the excise tax. Based on average annual cost projections, Towers Watson estimates that the tax cap will affect more than 60 percent of employers by its first year of implementation in 2018, with many more to follow soon thereafter.

"To avoid significant tax penalties in 2018 and beyond, all employers will need to make structural program changes in the near term to moderate cost increases," said Maselli. "While the excise tax is potentially the most expensive provision, there are others that will drive up employer costs."

One such provision under the reform law is the requirement for employers that offer dependent coverage to extend coverage to employees' children up to age 26. Only 16 percent of survey respondents indicated that they would implement this coverage extension before the mandatory deadline of January 2011.

Targeting Retiree Health Benefits

Although employers remain firmly committed to providing health benefits for active employees, the same cannot be said for their retirees. Most employers surveyed (77 percent) believe that reform will reduce the number of large employers offering employer-sponsored retiree health benefits, and 43 percent of employers that currently offer retiree benefits plan to reduce or eliminate them.

This trend is even more pronounced for employers likely to be subject to the excise tax on expensive plans. Of that group, 55 percent are likely to eliminate or reduce retiree medical programs.

"Just as many Baby Boomers are deciding whether to delay retirement, employers will be determining if it makes financial sense for them to remain in the retiree medical business," said Dave Osterndorf, a senior consulting actuary with Towers Watson. "Post-65 retirees already have a range of cost-effective options as individual consumers. Beginning in 2014, when health insurance exchanges become operative, pre-65 retirees will have access to competitive plan choices without pre-existing condition underwriting. This important development will likely accelerate employers exiting sponsorship of retiree health programs."

Reassessing Total Rewards Strategies

As employers consider whether to contain costs by reducing benefits, coverage subsidies and plan options, many understand that an ancillary impact of reform will be new challenges to employee reward programs. More than a third (35 percent) of employers surveyed believe that reform will have a negative impact on their ability to offer a competitive total rewards package.

"Health care reform will affect the fundamental balance of reward programs," said Maselli. "This is a great opportunity for employers to examine their total rewards strategy and determine the right mix to continue to attract and retain top talent."

Stephen Miller is an online editor/manager for SHRM.

Related Articles: 

Brokers Say Group Health Rates Rising for 2011, SHRM Online Benefits Discipline, June 2010

Employers: Expanded Coverage Will Raise Health Care Costs, SHRM Online Benefits Discipline, May 2010

Employer-Sponsored Health Benefits: ‘Reformed’ into Obsolescence?, SHRM Online Benefits Discipline, May 2010

Health Reform's Coverage Requirements Expected to Drive Premiums Higher, SHRM Online Benefits Discipline, April 2010

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page

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