Healthcare Benefits Keep Evolving
Employers are keeping their healthcare costs down, in part by continuing to shift more costs to their employees. Private healthcare exchanges represent the next step in this approach.
By Andrew R. McIlvaine
This year saw one of the lowest increases in healthcare costs in recent history -- and next year should see another relatively low increase, provided that employers continue what they've been doing to keep costs under control, according to Mercer.
In fact, despite predictions that healthcare reform will encourage more employers to drop their health benefits, Mercer's National Survey of Employer-Sponsored Health Plans revealed a small increase in the number of companies that provide health benefits, rising from 55 percent in 2011 to 59 percent this year, after falling in each of the two previous years.
"We find this trend interesting because it indicates that employers have discovered that healthcare costs are something they can get a handle on through health-management programs and consumer-directed health plans," says Beth Umland, Mercer's director of research for health and benefits.
According to the survey, the growth in the average total health benefit cost per employee slowed from just over 6 percent in 2011 to just 4.1 percent this year, with costs averaging $10,558 per employee in 2012. The survey, based on responses from 2,809 employers, found that large employers (those with 500 or more employees) experienced a higher increase, at 5.4 percent. Respondents expect costs to go up by a relatively modest 5 percent for 2013.
The Patient Protection and Affordable Care Act, which will require employers to cover more workers and is now a certainty with President Obama's reelection, has helped spur employers to be more proactive in controlling costs, says Tracy Watts, a partner at Mercer's Washington office.
"I think what's compelling is that once employers figured out how much cost was going to be added to their program because of healthcare reform, they got serious about strategies for managing costs -- to go a bit further, to push a little harder," she says.
Those strategies have included using incentives to push employees to enroll in wellness programs and shifting more costs to employees via high-deductible consumer-directed health plans, says Umland. The survey found that enrollment in CDHPs rose from 13 percent of covered employees to 16 percent this year, while the total number of employers offering CDHPs rose from 17 percent in 2011 to 22 percent this year (with 36 percent of companies with 500 or more employees offering them). Eighteen percent of large employers expect to offer a CDHP as their only health plan five years from now, compared to 11 percent that offered it as the only option last year.
The cost-shifting trend may be culminating in the growing number of companies that are switching to a "defined-contribution" approach to healthcare by giving employees a fixed amount each year to go and purchase their own coverage. Forty-five percent of employers say they currently use or plan to use this approach, according to the survey.
What perhaps best epitomizes this approach is a growing interest in private healthcare exchanges, says Watts. More than half of the survey respondents (56 percent) said they would consider a private exchange (based on a model similar to the public exchanges mandated by PPACA) for their active or retired employees.
In September, Aon Hewitt announced that more than 100,000 U.S. employees would be enrolling in healthcare benefits via its new Corporate Exchange model, a fully insured, multi-carrier healthcare exchange. Sears Holdings Corp. and Darden Restaurants Inc. are among the Aon Hewitt clients that will be using the exchange: Employees at both companies will be given fixed amounts of money to purchase their own coverage on the exchange.
"One of the things [employees] asked for was more choice in their healthcare," Ron DeFeo, a spokesman for Orlando, Fla.-based Darden, told the Associated Press. "As we looked for a way to do it, this was the best option."
A private exchange is "a very pure vehicle to get to a defined-contribution approach" to healthcare benefits, says Watts.
A defined-contribution approach may be especially enticing to employers concerned that traditional health benefits are no longer sustainable for them, says Mark Olson, senior consulting actuary at Towers Watson. Although Towers Watson expects healthcare costs to rise at a relatively modest rate of 5.3 percent in 2013, that still outpaces the consumer-price index, he says.
"For a lot of employers, healthcare costs have been going up at a much greater rate than that," he says. "For these companies, a defined-contribution approach to healthcare benefits is the next frontier."
Employers that consider their healthcare benefits to be a strong "value proposition" for employees will be less interested in a DC approach than employers in high-turnover industries such as retail or those that are "having a tough time, economically," says Olson.
For employees, the advantage of a private exchange is they'll have a greater choice of healthcare plans to choose from. On the other hand, says Watts, many employer-sponsored healthcare plans -- particularly at larger companies -- are closely integrated with those organizations' wellness and safety programs. "You would lose some of that going to a private exchange," she says.
The potential drawback to a DC approach is that as long as healthcare costs continue rising, employees will be picking up an ever-larger share of their costs unless employers choose to continue adjusting upward the set amount they give to their employees each year, says Olson.
In addition to cost-shifting, Mercer's survey found that effective health-management programs (programs that encourage employees with chronic illnesses to treat and manage their conditions) were also a big factor in limiting healthcare costs, says Umland.
"These programs are designed to reach the high-cost patients -- the folks with conditions like heart disease and diabetes -- who drive so much of the cost in healthcare," she says.
The survey found relatively few employers that plan to stop offering health coverage: Only 7 percent of large companies and 22 percent of small ones (those with 10 to 499 employees) said it is "likely or very likely" that they will do so.