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Employers: Expanded Coverage Will Raise Health Care Costs
Several options for offsetting the cost of covering adult children

By Stephen Miller  5/25/2010
 

Many U.S. employers are bracing for higher health care costs as a result of health reform mandates that take effect with the 2011 plan year. According to a survey of nearly 800 employers released by Mercer, an HR consultancy, the cost impact will range from moderate to severe, depending on the employer’s circumstances.

Two provisions going into effect in 2011—expanded coverage for older children and a ban on the use of lifetime benefit dollar limits—are significant concerns for about a fifth of employers. Mercer surveyed 791 employers in May 2010 about whether they expect Patient Protection and Affordable Care Act requirements will cause costs to rise in 2011, and if so, by how much. Among the findings:

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.

Two-fifths predict an increase of 2 percent or less.

Just 3 percent said their plans were already in compliance and would see no cost increase.

“Average health benefit cost per employee has been rising consistently at about 6 percent for the past five years,” said Tracy Watts, a consultant in Mercer’s Washington, D.C., office. “That seems to be employers’ threshold of pain. If compliance with health insurance reform pushes the cost increase up toward double digits, employers will be exploring ways to bring it back within their comfort zone.”

(For additional estimates on the likely increase in health care costs due to adult-child coverage and the possible impact of adverse selection, see the tint box at the end of this article.) 

Responses to the Adult-Child Mandate

Few employers will cover adult children up to the age of 26 before they are required to do so (which, for most plans, will be January 2011). Under most policies, children lose their eligible-dependent status on graduation, although they have the right to elect COBRA continuation coverage. Only 6 percent of survey respondents currently extend coverage to dependent children up to age 26.

While insurers might have felt pressure to comply early, employers are not so eager to pay an unplanned expense. Only about one-fourth of the survey respondents that don’t already cover children up to age 26 say they are likely to begin before their next renewal in January 2011. Large, self-insured employers are even less likely to act before they have to: Among respondents with 5,000 or more employees, just 16 percent say they are likely to implement the rule early.

Most of the insurance companies that are extending dependent eligibility immediately are giving their group plan customers 30 days to opt out. The survey results suggest that most employers will choose to wait.

“It’s easy to see why employees want this provision to go into effect now,” said Watts. “But this change is a pretty big deal for employers, with new notification requirements, employee communication and tax implications. Not to mention that it would be an immediate, unbudgeted business expense.”

Whenever they implement the rule, employers are considering a number of possible actions to take to offset the increased cost that adding dependents can bring:

Nearly half of surveyed employers (49 percent) would seriously consider requiring proof that dependents do not have coverage available to them through their own employers. However, at this time it isn't clear how adult children would "prove a negative" (see “ Temporary Complication’ in Coverage of Young Adults Poses Challenges).

A fifth would seriously consider changing contribution rate tiers—for example, from just two rates for employee-only and family coverage, to four or more rates based on the number of dependents covered, shifting the additional cost to employees covering the most family members.

Others (16 percent) say they are likely simply to require higher contributions for all dependent coverage.

Respondents will strongly consider these actions with regard to dependent eligibility

Require children age 26 and older to verify that no other coverage is available.

49%

Change premium rate tiers.

20%

Impose higher premium share for all dependents.

16%

Use more restrictive eligibility rules for dental and/or vision coverage.

12%

Source: Mercer's 2010 Survey on Health Reform—Sizing Up the Challenge.

Auto-Enrollment Concerns

The reform act will require employers each year to enroll new and current employees automatically in a health plan that meets government specifications. This mandate is expected to take effect in January 2014, although the vague wording of the reform statute leaves the date subject to regulatory guidance.

Auto enrollment is a significant concern for 16 percent of respondents. Most—88 percent—currently do not auto-enroll new hires in a plan.

Employers are already considering how to manage the cost of the auto-enrollment requirement as more employees join the plan:

About 43 percent say they will strongly consider using their lowest-cost plan as the default (another 23 percent offer only one plan).

About a fifth of the employers say they are strongly considering imposing the maximum allowable waiting period—90 days—before enrolling new hires.

Respondents will strongly consider the following actions with regard to auto-enrolling new hires

Use lowest-cost plan or only plan as the default.

43%

Impose a waiting period of up to 90 days before auto-enrolling.

20%

Add a new plan to use as the default.

  8%

Source: Mercer's 2010 Survey on Health Reform—Sizing Up the Challenge.

Covering Part-Time Workers

Retailers are particularly focused on the cost of covering more part-time workers. A provision that takes effect in 2014 requires employers to offer “affordable” coverage to all employees working an average of 30 hours or more a week (or else be subject to penalties). That mandate is a significant concern for 24 percent of respondents in the retail industry, which relies heavily on part-time labor, compared to just 11 percent of survey respondents overall.

Among the 26 percent of respondents that are currently not in compliance with the affordable coverage rule:

One-fifth say they will strongly consider changing their workforce strategy so that fewer employees work 30 hours or more a week.

16 percent say they will strongly consider adding a lower-cost plan for these newly eligible employees rather than adding them to an existing plan for full-time employees.

Only 8 percent say they would seriously consider making no or minimal changes to increase the number of eligible employees and instead pay the required penalty.

Possible actions with regard to the requirement that all employees working 30 hours or more per week must be eligible for health coverage

 

Would strongly consider

Would consider

Change workforce strategy so that fewer employees work 30 hours or more per week.

20%

34%

Offer only a lower-cost plan for part-timers.

16%

38%

Make minimal or no changes; instead, pay shared responsibility penalty.

  8%

38%

Source: Mercer’s 2010 Survey on Health Reform—Sizing Up the Challenge.

“While each new rule that adds administrative burden has the potential to increase cost, employers have certainly had to cope with compliance challenges in the past,” said Beth Umland, Mercer’s research director for health and benefits. “Nothing in our survey results suggests that they’re about to scrap their health plans and head for the hills.” 

Other Views on Adult-Child Coverage Costs

 

The Department of Health and Human Services (HHS) released estimates in May 2010 of the costs and benefits of the requirement to cover adult children up to age 26, as part of a regulation directing employers and insurers on how to carry it out. The new benefit is estimated by HHS to cost $3,380 for each dependent, raising premiums by 0.7 percent in 2011 for employer plans, according to the department's mid-range estimate. Some 1.2 million young adults are expected to sign up, more than half of whom would have been uninsured. (See Agencies Issue Interim Rule on Child Coverage until Age 26.)

 

Health insurers predict somewhat higher premium increases related to the expanded coverage requirement. Dr. Jeffrey Kang, chief medical officer at Cigna Healthcare, told SHRM Online, "If you’re an employer that is currently covering dependents up to age 23, which is what most employers do, we're estimating the cost impact of covering dependents up to age 26 is roughly a 1.5 percent to 2 percent additional increase in premiums." (See Health Reform's Coverage Requirements Expected to Drive Premiums Higher.)

Adverse Selection Fears

According to the Obama administration, some 30 percent of young adults under the age of 26 are currently uninsured. While in general young adults are not high users of the health care system, there are concerns about the impact of adverse selection with this population. That is, prior to 2014 when all Americans must secure health care coverage, healthy young adults may chose to forgo coverage through their parent's plan, while the estimated one in six young adults with chronic health issues would be the most likely to accept coverage under their parent's plan. This self-selection for coverage by the least healthy could result in higher coverage costs than the estimates presented above. 

"We are concerned about the adverse selection impact," commented Bruce Davis, health and group benefits national practice leader at HR consultancy Findley Davies. "Initial observers were saying to factor in maybe a 0.7 percent of claims costs associated with covering adult children. But it's really unknown at this time what kind of an impact it could have on a plan."

Davis said as of May 2010 his firm is forecasting an additional cost increase of 2 to 2.5 percent to account for the unknown cost of adding adult children, and an overall health care cost trend increase of around 11 percent for 2011. 

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Temporary Complication’ in Coverage of Young Adults Poses Challenges, SHRM Online Legal Affairs, May 2010.

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

Automatic Enrollment for Large Employees to Kick In, SHRM Online Benefits Discipline, April 2010.

Reform Law Will Require New Plans to Cover Preventive Care and Limit Out-of-Pocket Expenses, HR News, April 2010

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