updated Apriil 23, 2020
While U.S. employers look to keep their workers safe and healthy, they could see their health care benefit costs jump as a result of both the spreading coronavirus and recent legislation requiring health plans to cover testing and related costs for COVID-19, the respiratory disease the virus causes.
"Many employers, particularly those who are self-funded, are concerned about the potential cost of treating the coronavirus for a significant portion of their employees," said Ed Fensholt, director of compliance services at benefits advisory firm Lockton Companies in Kansas City, Mo.
Scott Behrens, director of government relations at Lockton, noted that "for fully insured plans, rates are locked in for the current year," so coronavirus-related health care cost issues "aren't going to be felt for insured plans until renewal" for the 2021 plan year.
Self-funded employers are "trying to figure out what their risk of increased claims might be," Behrens said. "Employers need to be aware of that risk."
Self-Funded vs. Fully Insured
In a self-funded (or self-insured) group health plan, the employer assumes the financial risk of paying for employees' health care claims under the cost-sharing terms of the plan. Employers typically set up a trust fund to earmark corporate and employee contributions to pay incurred claims. A third-party administrator, such as an insurance company, usually manages the plan.
For fully insured plans, the employer and employees pay premiums directly to an insurer, which pays health providers based on the cost-sharing terms of the plan.
"Since a self-insured employer assumes the risk for paying the health care claim costs for its employees, it must have the financial resources to meet this obligation, which can be unpredictable," the Self-Insurance Institute of America, a trade association for service providers, advised.
Higher Costs Ahead
Self-funded employers could see their health claims jump by as much as 7 percent this year if many of their workers are hospitalized with COVID-19, health plan actuaries at consultancy Willis Towers Watson predict in a new analysis. Both self-insured and fully insured employers could see a bigger premium rise next year, outpacing the average 6 percent increase (with no plan changes) or 5 percent increase (with plan changes) of recent years.
The size of 2021 premium increases will likely depend on:
- Effectiveness of policies to mitigate the spread of the virus.
- Potential for new waves of COVID-19 infection.
- Costs of a vaccine or therapeutic agents.
The Families First Coronavirus Response Act (FFCRA), enacted March 18, and the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted March 27, expand coverage requirements for all health plans, including employer-sponsored group plans, whether self-insured or fully insured.
The FFCRA's health care provisions require health plans to provide coverage without any cost-sharing requirements, such as deductibles, co-payments and co-insurance, or prior authorization or other medical management requirements for these coronavirus-related services:
- The costs of a test to detect the coronavirus that causes COVID-19.
- Health care provider visits, including telehealth, urgent care and emergency room visits, that result in a test to detect the coronavirus.
These requirements took effect March 18, will continue for at least 90 days and may be extended by the Department of Health and Human Services.
The CARES Act extended the cost-sharing waiver to any services or items provided during a medical visit, whether in person or through telehealth services, that results in coronavirus testing while there is a declared public health emergency under federal law.
Options for Self-Funded Employers
Following passage of the CARES Act, major health insurance carriers, including Aetna, Cigna, Humana and United HealthCare, as well as Blue Cross/Blue Shield in many states, announced they would go beyond the requirements of the new legislation and waive cost-sharing for hospitalizations related to COVID-19 treatment for fully insured plan members. The carriers gave self-funded plans for which they serve as third-party administrators the option to do the same.
"Self-insured employers are being asked to choose whether or not to waive cost-sharing, which includes deductibles, co-insurance and co-pays for COVID-19 treatment," wrote Tracy Watts, national leader for U.S. health policy at HR consultancy Mercer, and Beth Umland, Mercer's director of health research. This coverage choice "comes at a time when many companies are already struggling with the business impact of COVID-19 and facing the prospect of furloughs and layoffs. Any decision that is likely to result in additional cost will need to be weighed carefully."
[SHRM members-only toolkit: Managing Health Care Costs]
Virus Severity Affects Cost Estimates
"The coronavirus continues to spread and place enormous pressure on our nation's health care system," said Trevis Parson, chief actuary at Willis Towers Watson. "This spike in the demand for care is likely to lead to a significant jump in employer health care costs beyond previous expectations." However, he added, "the ultimate financial impact will depend on many factors, including the portion of the population infected and the severity of their illness."
In its COVID-19 cost analysis, Willis Towers Watson estimated the health care costs per infected person, including medical care and prescription drugs, as follows:
- About $250 for mild cases.
- $2,500 for moderate cases.
- $30,000 for severe cases requiring an inpatient hospital stay.
- Close to $100,000 for catastrophic cases requiring intensive care.
If 30 percent of the population becomes infected, employer health care costs could increase between 4 percent and 7 percent, depending on how sick COVID-19 patients become, the analysis found.
At a 10 percent infection level, costs could rise between 1 percent and 3 percent, the analysis showed. In a 50 percent infection level, costs could rise 5 percent to 7 percent.
The analysis also considered reduced cost for patients who do not have COVID-19 and defer care or receive care in lower-cost settings.
"The effectiveness of our containment strategy will determine what portion of the U.S. population will become infected," Parson said. "And that will have an impact on additional costs, which employers will need to consider as they design and finalize their benefit strategy and plan for 2021."
Common Coronavirus Costs
According to Terry Reams, president of west region employee benefits at insurance brokerage Hub International, key treatments for coronavirus and associated costs are:
- Test to diagnose COVID-19: $50 to $95.
- Administration of the test: $100 if performed in a doctor's office and up to $1,000 if performed in an emergency room, with costs varying by geography.
- Additional care performed outside of an in-patient facility: $4,000 on average.
- Admission and treatment in a hospital: $10,000 per day with an average stay of 10 days.
Patients with asthma or other respiratory issues, or chronic conditions such as diabetes, are more likely to need more intense and expensive care, Reams noted.
Financial Effects Will Vary
When anticipating potential costs, employers should "take into account demographic differences between the general population and an employer plan's population," Behrens at Lockton advised. The virus is far more severe for older workers and people who have underlying health conditions, so employer groups that tend to be younger and healthier could be less affected.
Workplaces with more smokers are expected to see higher health care costs, such as more hospitalizations, due to the virus.
Employers can help control coronavirus-related costs by steering employees with less-severe symptoms toward telemedicine and other low-cost alternatives to the emergency room, Behrens said.
For employees with severe symptoms that could be life-threatening, such as difficulty breathing, health authorities advise going to the hospital, Fensholt noted. But when symptoms are less severe, "you don't want your employees rolling into the ER," he said.
Behrens added, "Encourage employees to call their doctor for information and a pre-screening" when it's practical to do so.
Another View: Lower Health Care Costs Ahead
While many assume employers will experience a spike in health care costs this year, actuaries at Chicago-based employee benefits broker Gallagher are predicting self-funded companies will experience the opposite. The reason is relatively straightforward: unnecessary surgeries/procedures will be tabled for the foreseeable future, and the government is likely to pick up most COVID-19 expenses.
To provide some context for what self-funded employers may experience, Gallagher predicts a self-funded U.S. factory with approximately 4,000 employees will have a 15 percent decrease in 2020 medical expenses, compared to the previous year.
Christopher Nadeau, regional executive vice president at Gallagher's benefits and HR consulting division, said the firm's Healthcare Analytics team has been taking a measured and holistic approach to self-insured cost trends as a result of COVID-19. "There are already multiple claims patterns emerging to support our projections," he said.
A significant component of cost projections will be the overall infection rate of the U.S. population, the infection rate of an employer's workforce and subsequent hospitalization of employees, Nadeau noted. "As no country to date has reported an infection rate higher than 0.5 percent, we believe many of the models out there are too heavily weighted at 30 percent to 50 percent infection rates. As of today, the U.S. is at 0.25 percent, with New York City at 1.3 percent, according to Johns Hopkins reported cases," he pointed out.
Even if enhanced testing levels increases the infection rates, Nadeau said, "we know that many of those cases are not hitting the health care system for a multitude of reasons. Therefore, our model reflects a more likely estimate of the total infections that will actually impact health plan cost for self-funded employers. We believe a more accurate range is 4 percent to 7 percent."
Pent-Up Demand Expectations
Actuarial analysis for similar crises, typically natural disasters, show that lack of access to facilities and health providers resulted in short-term claim reductions for scheduled and non-urgent care, Nadeau said. "Surprisingly, our analysis has consistently shown that close to 50 percent of those variable claims never show up back in the health care system. There is not a dollar for dollar pent up need for care that will emerge once the U.S. gets back to business as usual."
As a result, "we estimate that in most typical scenarios, this short-term reduction in cost and utilization will offset self-funded employers increased direct COVID-19 claim and testing expense."
Related SHRM Articles:
Forecasters Revise Outlook for Higher Health Plan Costs, SHRM Online, May 2020
Guidance Clarifies COVID-19 Diagnostic Testing Mandate, SHRM Online, April 2020
States Order Insurers to Let Employers Cover Furloughed Workers, SHRM Online, April 2020
Valuing Health Plan Costs for Payroll Tax Credits, SHRM Online, April 2020
How the CARES Act Changes Health, Retirement and Student Loan Benefits, SHRM Online, March 2020
IRS Relaxes High-Deductible Terms for COVID-19 Testing and Treatment, SHRM Online, March 2020
The Potential National Health Cost Impacts to Consumers, Employers and Insurers Due to the Coronavirus (COVID-19), Covered California, March 2020