Health Reform's Coverage Requirements Expected to Drive Premiums Higher

Higher cost trend might pose communications challenges for employers

By Stephen Miller April 16, 2010

New coverage mandates under the comprehensive health care reform measure enacted in March 2010 will add to upward pressures on premiums paid by employers and employees, Dr. Jeffrey Kang, chief medical officer at Cigna Healthcare, told SHRM Online.

During an April 13, 2010, interview at the 2010 World Health Care Congress, held near Washington, D.C., Kang said the immediate impact of health care reform on costs for employers would revolve around three big drivers: the move to cover dependents up to the age of 26, first-dollar coverage for all preventive care services, and elimination of lifetime maximums, each of which takes effect in 2011. Citing research by Cigna, one of the largest U.S. health care providers, Kang shared what he termed "hot off the presses" estimates for expected percentage increases for group plan premiums in addition to what the annual cost trend increases for employer-provided plans would otherwise be.

"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. If you are an employer that has previously had no coverage of preventive care, then it's about a 3 to 4 percent increase on your premiums to introduce that benefit. If you are covering preventive services but you have some cost-sharing on those services, whether co-pays or deductibles, then eliminating that cost-sharing may amount to an additional 1 to 2 percent increase," Kang said.

In terms of eliminating lifetime maximums, Kang said that most companies with 100 or more employees are likely to have lifetime limits of $5 million to $10 million in place, "and very few people actually hit that lifetime maximum, so the cost impact for large employers is perhaps only an additional tenth of a percent to a half percent of total premiums." However, he added, "for smaller employers with low lifetime maximums of $500,000 to $1 million, there could be a significant premium impact. I encourage those employers to consult with their insurance carriers for estimates of what the impact will be from a cost perspective."


New Law, New Health Care Costs
Dr. Jeffrey Kang, chief medical officer at Cigna Healthcare, analyzes how health care reform ultimately may affect employers’ short- and mid-term costs.
• View this video

Communications Challenges

For 2010, costs for the most popular types of health care coverage were projected to increase again at double-digit rates, according to a survey of U.S. insurers and administrators by Buck Consultants. The expanded coverage requirements taking effect in January 2011 will make the cost trend's upward trajectory that much steeper.

Expanded coverage requirements are expected
to increase the cost trend's upward trajectory.


As to post-reform premium increases and the communications challenges they might pose during open enrollment season, "that actually depends on who is going to pick up those increases," Kang observed. "If the employer picks them up, no communications problem. If they pass them along to the employees, it then becomes something of an issue."

He advised explaining to employees the factors in the reform law driving larger premium increases. "They are all good things—100 percent first-dollar coverage of preventive services, elimination of lifetime maximums, increasing coverage to dependents up to 26 years old. It's hard to argue with them. So I don't think communications will be terribly difficult on those short-term design changes. As for longer-term cost pressures, it's a little different."

Long-Term Cost Factors

Over the mid- to long-term, other elements of the reform measure will take effect and add to employers' costs, Kang explained. Among these, "there are three or four very large taxes in this bill, including taxes on medical device manufacturers, pharmaceutical manufacturers and health insurers. In additional, there is the expansion of the Medicare payroll tax for high earners. All of these will at some point, whether directly or indirectly, flow back to the employer and result in increased costs on a premium basis," Kang predicted.

Another large cost driver, which is harder to estimate, he said, is the cost shift that occurs when the government's Medicare and Medicaid programs underpay doctors and hospitals, leading those service providers to then charge more to private-sector payers to make up the difference (see Report: Best, Worst U.S. Cities for Hospital value). "About half of the 32 million uninsured that will be getting coverage under health care reform are going to receive Medicaid managed care services," Kang stated. "This means that there will be 16 million more people in Medicaid managed care. … It's been well-described that Medicaid definitely underpays providers, and those doctors and hospitals will then cost shift to employers and commercial health plans."

Consumer-Driven Trend Seen Continuing

Despite some limits being placed on plans with extremely high deductibles, "the movement toward health care consumerism is well-entrenched and will continue over the next several years and decades," Kang expects, regardless of health care reform. He noted that more employers are providing incentives to employees, "whether it's through a high-deductible plan with a health savings account or even in a co-insurance plan, to focus on selecting the highest quality and most cost effective providers." Relatedly, he noted, "there is a continued demand for us as payers to supply [cost and quality] information regarding doctors, hospitals, ambulatory surgery, high-tech radiology" and other health care services.

Payment Reform

Regarding payments to service providers, Kang lamented that "we are paying for service and quantity, and the reality is we should be paying for quality and results. Unfortunately, the [health care reform law] does not do much in that area other than provide for a few demonstration or pilot programs. In the long term, innovation is going to have to come from the private sector, and in particular from thoughtful employers willing to work with their health plans to try to accelerate movement toward pay for results and performance."

Partnering with Insurers

Kang advised employers to work more aggressively in a partnership with their insurers on benefit design issues, including "health and wellness initiatives to incent healthier behaviors and to create a 'culture of health' in the workplace."

Another area where employers should partner with their health insurers, Kang said, is on network design. "Right now, employers often focus on providing access to the broadest network. They should begin to think about working with their health plan to define a network of doctors and hospitals that add value by providing services of the highest quality that are also cost effective." To make use of these networks effective, Kang suggested larger differentials between in-network and out-of-network services. "In essence, the message should be, 'this is your network, it's a high quality network, and we'd like you to go see those doctors and hospitals.'"

Regulators Urged to Examine Premium Hikes

In a move intended to warn health insurers about premium increases that the government may deem too high, U.S. Department of Health and Human Services Secretary Kathleen Sebelius urged governors and state insurance commissioners to examine premium increases in their states. “For too long in this country, Americans have been at the mercy of insurance companies, and have ended up paying a steep price,” Sebelius wrote in a letter dated May 5, 2010. “Using faulty assumptions and loopholes, insurers have tried to game the system and consumers have ended up with one bad deal after another.”

Sebelius' letter encouraged governors and state insurance commissioners to review and approve insurance rate increases before they take effect, to the extent you have authority to do so.

Others dispute the claim that U.S. health insurers engage in excessive overpricing. Overall, the profit margin for health insurance companies was a modest 3.4 percent in 2009, according to data cited by Mark J. Perry, a professor of economics and finance at the University of Michigan.

"Even if we could strip away 100 percent of the health insurance industry's profits, it would only save patients between $100 and $200 per year in health insurance costs," Perry writes.

Stephen Miller
is an online editor/manager for SHRM.

Related Articles—SHRM:

Grandfathered’ Plans Spared Some Reform Mandates, SHRM Online Benefits Discipline, April 2010

Double-Digit Health Care Cost Increases Expected to Continue, SHRM Online Benefits Discipline, February 2010

Employers Take Further Steps to Rein In Health Costs, SHRM Online Benefits Discipline, February 2010

Intel Chairman: Transforming Health Care Is Employer Imperative, SHRM Online Benefits Discipline, March 2008

Related Article—External:

Health Insurers: Brace for Fast and Furious Costs,, April 2010

Healthcare Overhaul Won't Stop Premium Increases, Los Angeles Times, April 2010

Health Care Voucher Provision May Inflate Employer Costs, Business Insurance, April 2010

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page

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