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Benefits Business
Cost control—A mixed bag
Mercer says employers report smallest cost increase in a decade; Towers Perrin points to emerging retiree cost challenges
By Len Strazewski
As lawmakers continue to debate health care reform, medical costs continue to increase and employers continue to tinker with their group health benefits in an effort to keep costs under control.
But whether it’s political pressure on the health insurance industry or the results of that tinkering, health benefits costs are moderating. Just as when an open market health insurance system was challenged by then First Lady Hillary Clinton in the 1990s, the rate of growth in employer health care costs slowed somewhat in 2009.
This time around, health benefit cost control also can be attributed to improved plan designs, and independent agents and brokers who offer group health benefits can take some credit for directing their customers to these improved plan designs.
Among the new designs are health management and wellness programs that guide employees toward better health outcomes, and consumer-directed health plans (CDHPs) that provide incentives for employees to become more involved in their health care decisions.
According to a new survey by Mercer, an employee benefits and human resources consulting company, employers in 2009 reported the smallest increase in their per-employee health costs in a decade, only 5.5%, after four years of annual increases that exceeded 6%.
For its 2009 National Survey of Employer-Sponsored Health Plans, Mercer received responses from 2,914 public and private employers with 10 or more employees.
“Small and large employers used different strategies to keep cost growth down in 2009,” said Beth Umland, Mercer’s director of health and benefits research. “Small employers moved employees into low-cost, consumer-directed health plans and raised PPO deductibles. We saw relatively little cost-shifting among large employers. What jumped out was a real increase in their use of programs and policies designed to improve workforce health.”
Responses indicate that increased use of wellness and health management programs paid dividends for the large employers that instituted them. Their cost increases averaged about two percentage points less than those of employers that did not use health management techniques.
Was the improvement worth the cost of the programs? Probably, consultants say, but cost-benefit analysis remains tricky.
“A lot more employers were willing to place their bet on health management in 2009,” said Linda Havlin, Mercer global health and benefits intellectual capital leader. “But they will want to see continual gains. Measuring health management ROI (return on investment) is inherently challenging and continues to evolve.
“There’s growing anecdotal evidence that well-designed and communicated health management programs can improve outcomes,” Havlin continued, “but we need to work harder at understanding and eliminating missed opportunities—and that includes changing noncompliant patient behavior.”
According to the survey, about 20% of all employers and about half of employers with 20,000 or more employees are using incentives to increase participation in health management programs, such as lower premiums for nonsmokers.
Small employers also are working to control their costs with new plan designs. According to the Mercer survey, more small employers in 2009 adopted consumer-directed health plans (CDHPs), which are priced about 20% lower than PPOs.
CDHP use by employers with 100 to 499 employees increased from about 9% in 2008 to 15% last year, the survey said. This helped drive the percentage of all covered employees enrolled in CDHPs from 7% to 9%. About 20% of employers with more than 500 employees offer CDHPs, and 43% of the largest employers offer CDHPs as a benefit option.
Employers are using CDHPs to offset in-network deductible increases by allowing employees to use their related savings accounts to accumulate money they save by making wiser health care choices, Umland said.
PPO enrollment was stable at about 69%, and enrollment in HMOs dropped from 23% to 21%, according to the survey.
Despite cost pressures, the survey found, the prevalence of employment-related benefits remained stable. In both 2008 and 2009, about 65% of all employers provided health benefits, and among large employers with 5,000 or more employees, health benefits are “almost universal,” according to the survey.
Retiree coverage trends
Retiree medical coverage, however, is far from universal, even among the largest employers. Only about 28% of large employers offer an ongoing benefits plan that covers pre-Medicare eligible employees, and only 21% provide one for Medicare-eligible employees.
As retiree medical costs increase, agents and brokers may find a burgeoning market for supplemental individual health benefits. Towers Perrin’s 2010 Retiree Health Care Cost Survey of 550 large employers indicates that employers are shifting more costs to retirees who have some retiree medical benefits or they are ending retiree medical benefits altogether.
The survey indicates that only about 45% of these employers subsidize retiree medical benefits and many have capped their contributions, leaving retirees to absorb future cost increases. In 2009, costs for pre-Medicare-eligible retirees rose about 6%, tracking closely with average benefit costs, and costs increased 4% for Medicare-eligible retirees.
“Virtually all retirees have been anxiously watching their investments over the last year and a half. For retirees supported by investment returns or living on fixed incomes, 2009 was a time filled with deep concerns,” said Dave Guilmette, managing director of the Towers Perrin health and welfare practice.
“In fact, many employers have already exited their role as plan sponsors for retiree medical benefits,” noted Dave Osterndorf, chief actuary of the health and welfare practice. “Only about one in three survey respondents is offering subsidized retiree medical benefits to current active employees.”
Among those who do presently offer retiree medical benefits to active employees, about 10% plan to stop and 20% say they are seriously considering withdrawing those benefits, Osterndorf added.
While most agents are concerned about how health care reform will affect their overall group health business, they also need to look at retiree medical issues. According to Towers Perrin, all of the major reform bills in Congress would change the individual insurance market in ways that would guarantee pre-65 retirees access to more affordable coverage with no health underwriting or exclusions for pre-existing conditions.
Some other provisions may prohibit employers from reducing benefits for retirees unless they reduce benefits for active employees. As a result, Towers Perrin predicts that more employers will stop offering retiree medical benefits before reform provisions take effect.
The same techniques that are helping to contain overall employee benefit plan costs may also work for retiree medical costs, Towers Perrin says. Health savings accounts (HSAs) allow active employees to save for future retiree medical costs and allow pre-65 retirees to pay medical costs with greater tax effectiveness. However, only about half of those surveyed offer HSAs.
Health reimbursement accounts (HRAs) also allow employees to save for post-retirement medical costs with unused contributions than can be accumulated in a companion retiree medical savings account (RMSA). Only about 9% of employers in the Towers Perrin survey offer these accounts.
Are your clients willing to consider these plan design changes? Probably, if they are promoted in the right way as important additions to their human resources strategy. About 64% of survey respondents say that having employees who are financially prepared to retire is important to their human resource management strategy. Only 28%, however, say their current employees are financially prepared.
The author
Len Strazewski has been covering employee benefits issues for more than 30 years and is employee benefits columnist at Human Resource Executive magazine. He has an M.S. in industrial relations from Loyola University in Chicago.
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