How much of an increase in benefit costs are employers willing to absorb next year? Would you believe it’s now up to 5.9 percent?
A new survey released this week by global consulting giant Mercer found that employers are changing their approach to health care benefit offerings for 2011, primarily because they have figured out that the cost advantages of making changes to their plans outweigh those of avoiding some health reform mandates through “grandfathering.”
The new health care reform law (known to many as Obamacare) gives employers a choice: If they avoid making certain changes to their health plans – such as raising the requirements for employee coinsurance — their plans will be “grandfathered” and exempt from a number of new, federally-mandated cost-sharing and coverage mandates.
Interim regulations released in June (by the U.S. Department of Health and Social Services) estimated that between 67 percent and 85 percent of employer plans would retain grandfathered status in 2011, but a new Mercer survey of nearly 1,100 employers found that today, just 53 percent believe they are likely to retain grandfathered status for all their plans – a somewhat smaller percentage than the government’s lowest estimate.
The reason for the decrease in companies retaining grandfathered status of their health plans? It’s because for many businesses, the cost advantages of making changes to their plans outweigh those of avoiding some reform mandates.
The Mercer survey asked employers about the cost impact of meeting the Patient Protection and Affordable Care Act (PPACA) requirements for 2011 – specifically, about extending dependent eligibility to age 26 and removing annual and lifetime benefit maximums on health plans. Employers estimated that making the changes would add 2.3 percent, on average, to their 2011 cost. They predicted their cost would rise by a total of 10.1 percent – if they made no cost-saving changes.
A 10% Cost Increase is Simply Not an Option
Mercer found that for many employers, absorbing a 10 percent health care cost increase is simply not an option. When asked for their targeted cost increase – the increase organizations hey hope to achieve after making such changes as switching plan vendors, raising deductibles, or offering a different type of plan – employers estimated that they could hold the cost increase to 5.9 percent, on average
“Six percent seems to be employers’ collective comfort level,” said Beth Umland, Mercer’s research director for health and benefits, in a press release accompanying the survey. “For the past five years the actual cost per employee has risen by about 6 percent annually, even as the underlying trend has been running at about 9 percent. Employers have been working hard to keep it at that level, and they’ll have to work a bit harder in 2011 to achieve the same result.”
Smaller employers – those with fewer than 500 employees – predicted an even larger underlying health care cost increase of nearly 12 percent, while large employers, which typically self-fund their plans, predicted an increase of about 9 percent if they made no changes other than those required by the PPACA. Still, small employers say they also expect to bring their cost increase down to 6 percent for 2011.
Overall, according to the Mercer survey, some 57 percent will ask employees to pay at least a greater share of the cost of health care coverage next year. Over half of these will increase the cost of dependent coverage proportionally, meaning that it will be more expensive than the cost of employee-only coverage. Mercer says this is likely a response to the expected increase in the number of dependents enrolled once employers must extend coverage to children up to age 26.
More health and wellness initiatives in 2011
But Mercer also notes that “raising employee contribution amounts doesn’t necessarily reduce health care spending; it just changes how cost is apportioned between the employer and employee.”
Many employers, the survey found, will be looking to reduce health care cost increases by improving workforce health and wellness, with 44 percent of respondents saying they will add health management or wellness programs or services in 2011, while another 38 percent plan to add incentives for employees to participate in the health management programs already available to them. In fact, the survey found that more respondents will attempt to curtail health care spending through new or improved health management programs in 2011 than through higher deductibles or other cost-sharing provisions.
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“This is a surprising – and encouraging – finding,” said Tracy Watts, a Mercer partner based in Washington, DC. “In a year when employers are dealing with additional cost pressure (from government-mandated health care), they are continuing to invest in health management – and demonstrating their belief that these programs bring a return on investment.”
The Mercer survey was taken in July to employers who registered for Mercer webinars on health care reform. It was the the second in an ongoing series of surveys designed to gauge employers’ response to specific reform provisions, and 1,091 employers participated, “with a good distribution by industry and employer size.”
One more important point: The survey focused on grandfathering and provisions effective in 2011, but because not all employers have definitive strategies in place, survey respondents were told that, “Gut reactions are allowed.”
What is “Grandfathering?”
And what exactly is “grandfathering” when it comes to health plans? To maintain grandfathered status, an employer can only make fairly minimal changes to the employee cost-sharing provisions in their plans, Mercer notes. They can’t raise deductibles or out-of-pocket limits by more than 15 percentage points beyond the increase in medical inflation, nor can they raise co-payments by more than that amount, or $5, if that is more. And they can’t increase employee co-insurance percentages at all. In addition, a health plan or benefit package will lose grandfathered status if the sponsor cuts their contribution rate toward total coverage costs by more than 5 percentage points.
if it sounds a bit complicated, it is. But, the Mercer survey also found that in their need to manage costs in 2011, many employers are not willing to stay within these federally-mandated limits. When asked what changes they would consider making that would result in the loss of grandfathered status, 35 percent said “increase deductibles or pit-of-pocket maximums by more than the allowed amount;” 31 percent said “increase employee coinsurance levels,” and 23 percent said “raise co-pays by more than the allowed amount.” About a fifth (21 percent) will consider seeking a new health plan insurer; this increases to 34 percent among the survey respondents with fewer than 500 employees.
This is an interesting survey by Mercer, but it comes with a big caveat: Since so many of the specific regulations about health care are still being written by the Department of Health and Human Services, much of the reaction to the Mercer survey is simply an educated guess. Until ALL of the specifics and regulations behind Obamacare become clear, no one really knows how much this will all cost — and how much employers can bear.
In other words, businesses are watching the next steps in health care reform carefully; hoping for the best, but fearing the worst.