Big Changes Considered

With the first wave of health care reform mandates behind them, employers re-evaluate plan designs.

By Susan J. Wells Jun 1, 2011
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For more than a year, employers have focused on complying with the early mandates of the Patient Protection and Affordable Care Act. But much bolder actions and strategic changes are expected in 2012 and beyond in response to the act’s remaining requirements. These may be the most systemic changes in decades.

“Employers reacted to the first wave of requirements, and we’ve now moved from careful consideration to implementation, longer-term planning and multiyear strategies,” says Sally Natchek, senior director of research at the International Foundation of Employee Benefit Plans in Brookfield, Wis. “The real action is about to take place.”

Indeed, large-scale changes appear to be imminent. Many employers will increase cost-sharing with employees or refocus their wellness initiatives. They will redesign their plans to avoid triggering the so-called “Cadillac” excise tax for high-value plans by 2018. And companies will analyze their benefits strategies in view of the state-run health insurance exchanges scheduled to open in 2014.

“Benefits managers have historically been focused on making incremental plan design changes,” says Randall Abbott, a senior health care consultant with Towers Watson. “Employers are now considering sweeping changes to their health benefit and workforce health improvement strategies.”

Managing Change

Health care reform has pushed the issue of plan design to the executive agenda. Nearly 80 percent of 381 executives representing 347 companies said their chief executive officers will be involved in responding to the reform law, according to Moving Forward: Companies Speak Out on Health Care Reform, a December 2010 survey report by consultancy Ernst & Young. Eighty-seven percent said chief financial officers will be involved.

Determining the next critical actions and implementing them will be challenging at all levels, considering the breadth of the law. It contains 2,400 pages of provisions, including many that require federal officials to issue more guidelines.

“Though the law brought an additional amount of work for benefits departments through compliance and employee communications, most benefits departments could not hire new employees,” notes Chantel Sheaks, a principal in government affairs at Buck Consultants. “Staffs were left to do much more with much less.”

Many employers are relying heavily on external guidance, with HR leaders budgeting more for consulting, education and compliance expenses,says Michael Thompson, principal of the human resource services group at the consulting firm PricewaterhouseCoopers.

Trek Bicycle Corp., a Waterloo, Wis.-based manufacturer, is one of many employers whose HR professionals have worked closely with benefits brokers, third-party administrators and other experts. Trek’s broker has helped to manage the detailed requirements of the reform law so far, and it has an attorney on staff who advises on compliance issues. Abby Giese, Trek’s benefits coordinator, expects to continue working with these advisors.

For Trek, though, the reform law hasn’t resulted in major changes to its plan or overall strategy. “The biggest challenge we faced was determining whether we should or could remain a grandfathered plan,” Giese says. “We made a change to become fully self-funded in 2011, and there was some question as to whether doing that precluded us from being a grandfathered plan.” After a thorough review, the company claimed grandfathered status. Giese began monitoring the plan and maintaining existing health plan features to preserve that status.

“Most of the nitty-gritty rules of health care reform were details our plan already had,” she says. For example, Trek’s plan already covered preventive care at 100 percent and allowed coverage of adult children, due to Wisconsin state health insurance rules.

“We aren’t projecting a huge impact to our plan operating costs in order to remain compliant,” Giese reports. Yet, she acknowledges, “It will certainly be interesting to see what else unfolds.”

The reform law’s impact varies by employer. For some, it has been substantial, particularly for employers with low-income and high-turnover workforces, Thompson says. Leaders of those companies have had to “rethink their entire business models to mitigate the likely costs of expanding coverage and meeting benefits mandates.”

For Trek and others, the effect has been relatively small. That has been the case for consumer health and pharmaceuticals giant Johnson & Johnson in New Brunswick, N.J. The 115,500-employee company has comprehensive programs in place that satisfy most of the reform law’s requirements. But the direction of future health benefits strategy is a high priority in overall planning, says Jennifer Bruno, executive director of Wellness & Prevention Inc., a Johnson & Johnson company. “Preparation is key—don’t wait for health care reform to ‘catch up,’ ” Bruno says.

Four Types of Plan Design Changes

Employers are poised to change health care plans in response to the health care reforms enacted in 2010. According to a recent Towers Watson report, the most notable planned benefits design changes will be:

Dependent coverage subsidies. Sixty-eight percent of employers will increase contributions for dependents, with 19 percent targeting per-dependent contributions and 35 percent using or planning to implement spousal waivers or surcharges when other coverage is available to spouses.

Retiree medical coverage. Twenty-six percent plan to end employer sponsorship, 25 percent plan to convert a current subsidy to a retiree health account and 23 percent plan to eliminate employer-managed drug coverage for post-65 retirees and rely on Medicare Part D plans.

Incentives for high-value providers. Twenty-eight percent plan to differentiate cost-sharing for high-performance networks or centers of excellence in 2012, and 21 percent plan to adopt value-based designs that minimize or eliminate out-of-pocket costs for high-value services during the next year.

Accountability for engagement. Beginning in 2012 or later, 33 percent say they'll reward or penalize employees based on biometric outcomes—for weight and cholesterol, for example. Just 7 percent did so in 2011, and 6 percent did so in 2010.

Source: The 16th annual Towers Watson/National Business Group on Health Employer Survey on Purchasing value in Health Care report, which tracks the health benefits strategies and practices of 588 employers.

Looking Ahead

Almost all employers are concerned about increased compliance and administrative burdens, Thompson says. For 2012, he expects employers to confirm that their plans comply with the reform law’s early requirements and to develop benefits strategies for the future.

The biggest upcoming changes could involve:

The law’s mandates on free-rider penalties. Companies that don’t provide insurance will be required to pay some of the cost of government subsidies given to lower-wage workers who buy insurance through state-run health insurance exchanges.

Putting the Brakes on the 'Cadillac' Tax

Adopting a laser-like focus on wellness, prevention and health care consumerism may be among the best ways to delay hitting the cost ceiling of the "Cadillac" excise tax until 2023 or beyond, according to Towers Watson's 2010 Health Care Cost Survey report.

"All it takes to drive costs above the excise tax cap for six in 10 employers is an 8 percent average annual cost increase. And, without making plan design changes, that's what many employers are projecting," says Dave Osterndorf, a consulting actuary with Towers Watson.

The survey data, for instance, show that the average 2010 costs of medical coverage for active single and family plans are $5,184 and $14,988, respectively. When these figures are projected to 2018—the year the excise tax takes effect—with reasonable estimates of future health care inflation, the tax is often triggered.

As a result, a plan with single-coverage costs of $11,200 in 2018 would exceed the limit by $1,000 and would be assessed a 40 percent tax of $400. If 10,000 employees were enrolled in that plan, the bill would be $4 million. For a fully insured plan, the tax would be charged to the insurer. An employer with a self-funded plan would owe the tax. Employers will either absorb the cost or pass some or all of it to employees as higher premiums, the report concludes.

In about half the industries examined, more than seven of 10 employers are likely to have at least one plan that will exceed the excise tax threshold in 2018. These include the aerospace, chemicals, energy and utilities, health services, and pharmaceutical industries.

The saving grace may come for employers that closely manage health benefits and keep annual plan cost increases at 6 percent. Osterndorf says these companies will experience about a five-year buffer before hitting the excise tax ceiling in 2023. To control costs, he adds, business leaders will emphasize workforce wellness, chronic-condition management and sensible use of health care services.

Waiting periods effective in 2014. Employees will wait no longer than 90 days before enrolling in an employer-provided health insurance plan.

But employers don’t have to worry about free-choice vouchers anymore. The $3.5 trillion budget deal struck in mid-April by the White House and Congress eliminated the controversial plan. As a result, employers will not be required to allow employees to opt out of their employer-sponsored plans and choose their own coverage through a voucher program.

In the meantime, employers that received interim waivers from the U.S. Department of Health and Human Services (HHS) are concerned about what coverage to offer in 2014 when the waivers expire, Thompson notes. As of March, 1,040 organizations had received the temporary waivers, which grant a one-year exemption from the reform law’s restrictions on annual dollar benefit limits.

Under the law, annual limits cannot be lower than $750,000 per beneficiary on or after Sept. 23, 2010. That increases to $1.25 million for plan or policy years beginning on or after Sept. 23, 2011, and $2 million beginning on or after Sept. 23, 2012, until annual limits are prohibited in 2014.

The one-year waivers are for certain limited benefit or “mini-med” plans that often have annual caps well below the restricted annual limits.The waivers are meant to protect against significant premium increases resulting from higher annual limits and to ensure that workers with those plans continue to have insurance until the state-run insurance exchanges open in 2014. HHS has granted waivers to several prominent insurers and employers, including BCS Insurance Co. of Oakbrook Terrace, Ill., the insurer of McDonald’s workers.

Many other employers need to plan for the Cadillac tax. While the excise tax doesn’t take effect until 2018, Towers Watson predicts that if current average annual cost increases continue, 60 percent of large U.S. companies will reach the taxable level by 2018. The provision levies a 40 percent nondeductible tax on the annual value of employee health plan costs that exceed $10,200 for single coverage or $27,500 for family coverage.

The excise tax was “to penalize employers with excessively rich health benefit plans,” says Towers Watson’s Abbott. “Assuming even reasonable annual plan cost increases to project 2018 costs, many of today’s average plans will easily exceed the cost ceiling primarily directed at today’s ‘gold-plated’ plans.”

A Deeper Focus

The provisions of the health care reform law will take years to implement. As a first step, employers quickly became familiar with the law and when the key regulations take effect. Now they are defining their immediate priorities, analyzing options, and developing long-term benefits programs and—in time, say HR and benefits professionals—a much broader business strategy.

While meeting the mandates, “We are also looking ahead to future years, especially 2014, to understand what will be expected,” says Ed Isakson, director of human resources for the 139-parish Roman Catholic Archdiocese of Indianapolis. “We are becoming much more focused on the reasons why we offer health care benefits and how to differentiate and market our program in a new environment where people will have many more choices.”

The author, a contributing editor of HR Magazine, is a business journalist based in the Washington, D.C., area.

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