Sweeping Health Plan Design Changes on Tap

Health costs could rise 7 percent in 2011; account-based plans projected to jump

By Stephen Miller, CEBS March 11, 2011

For plan year 2011, employers focused their efforts on compliance with the new health care reform coverage requirements. But looking ahead to 2012 and beyond, many are pursuing bolder actions to manage costs and improve worker health, according to findings from the 16th Annual Towers Watson/National Business Group on Health Employer Survey on Purchasing value in Health Care.

U.S. employers expect average costs for active health care benefits to increase by 7 percent in 2011, up from a 6 percent increase in 2010. While increases have stabilized over the past few years, they considerably outpace wage increases year over year, continuing to place significant financial pressure on employees and their families.

According to the survey report:

  •  Total anticipated annual costs per active employee in the U.S. are expected to reach $11,176 (up 7.6 percent from $10,387 in 2010).
  •  The average employee’s share of costs in 2011 is expected to rise 11.8 percent, to $2,660.

“We cannot continue to think that the rise in health care costs is sustainable. Health care costs have experienced dramatic cost inflation over the past two decades, and employers continue to subsidize the majority of plan costs,” said Helen Darling, president of the National Business Group on Health. “But these costs are cutting into employers’ profitability and the total rewards they are able to offer employees. Plus, concerns about the future 'Cadillac' tax add a new level of urgency to their challenges.”

Adopting Account-Based Plans

The report revealed cost variations in the different plan types, particularly with regard to consumer-directed health plans linked to health savings accounts (HSAs) and health reimbursement arrangements (HRAs)—termed "account-based health plans" in the report—and traditional health plans.

  • HSA- and HRA-linked plans are the most affordable plan type, costing $730 less than health maintenance organizations (HMOs) for employee-only coverage and $2,118 less for family coverage.
  • Preferred-provider organization (PPO) and point of service (POS) plans are the most expensive plan types, costing an average employee about $200 more than a typical HMO plan for single-only coverage and more than $750 more for family coverage.

HSAs in the Lead

In 2002, just 2 percent of all U.S. employers offered consumer-directed, account-based health plans but by 2011 that number had exploded, according to the Towers Watson/National Business Group on Health study. Here's the breakdown and outlook:

  • Health savings accounts (HSAs)—the most popular savings vehicle—are gaining ground: 41 percent of U.S. companies offered an HSA in 2011 with another 12 percent expected to do so in 2012.
  • Health reimbursement arrangements (HRAs), in contrast, were offered by 20 percent of companies with another 5 percent expected to offer one in 2012.

In 2011, 8 percent of U.S. employers offered a "total replacement" account-based health plan as the sole coverage option to at least a portion of their workforce (typically salaried non-union but increasingly hourly non-union as well). That rate could reach almost 13 percent by 2012 if companies follow through with their current health plan strategies.

U.S. employers are encouraging account-based plan adoption by offering employees significant reductions in premium contributions, according to the report, in order to help control the employer's cost:

  • Lower premiums for employees:56 percent of employers set employee premium contributions for their HSA- or HRA-linked plans at least 20 percent lower than contributions for their traditional plans. And 26 percent cut employee premium contributions for HSA- or HRA-linked plans by more than half when compared with other plan types.
  • Lower costs for employers:Companies that added 10 percent or more employees to their account-based health plans for 2010 held their health care costs nearly flat. Those that were most successful at driving HSA- or HRA-linked plan adoption reduced their costs by nearly $1,000 per employee.

In addition to lowering employer health care cost trends and helping delay costs related to the 2018 excise tax on high-value health coverage, HSAs provide employees with the option to pay for current costs out of pocket and thereby use the account as a wealth-accumulation vehicle for retirement, according to the report. (HSAs are portable when employees terminate employement, unlike HRAs which generally are forfeited to the employer.)

Wide-Ranging Design Changes

“Health care benefit managers have historically been focused on making incremental plan design changes,” said Randall Abbott, a senior health care consultant with Towers Watson. “When confronted with the post-reform health care landscape, employers are now considering sweeping changes to their health benefit and workforce health improvement strategies. Increasingly, this is a focus of the executive suite, which is accelerating the discussion.”

Among the notable planned benefit design changes are:

  • Dependent coverage subsidies: 68 percent are moving to increase contributions for dependents, with 19 percent targeting per-dependent contributions, and 35 percent using or planning to implement spousal waivers or surcharges.
  • Retiree medical coverage: 26 percent of employers plan to cease 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: 28 percent of employers plan to differentiate cost sharing for high-performance networks or centers of excellence in 2012, and 21 percent plan to adopt value-based designs over the next year. In addition, 18 percent plan to offer incentives or penalties to providers for coordination of care, use of emerging technologies or use of evidence-based treatments.
  • Accountability for engagement:A third of employers plan to reward or penalize their employees based on biometric outcomes (for weight and cholesterol) vs. just 7 percent in 2011 and 6 percent in 2010.
  • Social media:Use of social media is one of the emerging creative strategies employers (9 percent) are using to improve employee health and well-being.

Cost-Sharing Strategies and value-Based Designs

After taking a breather to focus on coverage changes required by the 2010 health care reform law, U.S. employers again are focusing on plan revisions that aim to control escalating costs.

Design change

In use in 2010

Added in 2011

Planned for 2012 or later

Structure most prevalent plan so that deductible for single coverage is $1,000 or more.




Increase employee contributions in tiers with dependent coverage (e.g., employee +1, +2, +3 or +4).




Use spousal waivers or surcharges (when other coverage is available).




Reduce cost sharing for use of high-performance networks or centers of excellence.




Offer incentives (or penalties) to providers for coordination of care, use of emerging technologies or use of evidence-based treatments.




Use value-based benefit designs (e.g., provide different levels of coverage based on value or cost of services).




Use reference-based pricing in medical plan (e.g., offer a limited level of coverage for a procedure).




Source: Towers Watson and National Business Group on Health

The survey was completed by U.S. employers from November 2010 through January 2011. Respondents employ 9.2 million full-time employees and have 7.8 million employees enrolled in their health care programs, equating to a collective $81 billion in total health care expenditures.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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