Affordability Gap Widens – Reform, Economic Downturn Combine to Increase Gap and Drive Significant Employer Action
High Performers Spend Nearly $2,000 Less per Employee Than Low Performers And Are Poised to Mitigate Financial Impact of Health Care Reform
STAMFORD, CT, OCTOBER 8, 2009 – Against a backdrop of prolonged recession, U.S. employers will see an increase in their medical benefit expenditures of 7% in 2010. The cumulative effect of ongoing cost increases combined with the current economic climate are creating significant affordability challenges for both employers and employees, according to new data from Towers Perrin. The study findings also show that many employers are preparing to take action by embracing new approaches to benefit management that have the potential to fundamentally transform the current model of health care delivery.
According to Towers Perrin’s annual Health Care Cost Survey, the 7% rise in 2010 medical benefit expenditures, although marking the sixth consecutive year of single-digit percentage increases, will mean record-high costs for both employers and employees. The average annual per-employee spend will, in 2010, cross the $10,000 mark, and while employers will continue to fund 78% of that amount, the actual dollar burden on employees has grown due to the ever-increasing cost base and the added impact of benefit design-related increases in out-of-pocket costs (Exhibit 1).
Employee premium contributions, on average, will rise by 10%, or just over $200, during 2010 – a bigger jump than the 8% increase seen in 2009. This additional burden is exacerbated by indirect cost shifting through benefit design changes such as increased copayments, which add significantly to the overall cost for employees.
“For employees, the affordability challenges associated with this year’s cost increases are even more acute than the general survey numbers suggest,” said Dave Guilmette, Managing Director of the Towers Perrin Health and Welfare practice. “The cost-shifting actions employers are taking for 2010 are consistent with what’s been done in years past, which is surprising in an economy where bigger shifts might be expected. Nevertheless, employees are feeling the impact more keenly given that these actions come at a time when wages at some organizations are flat or declining, 401(k) balances and employer matches are down, and other aspects of total rewards such as bonuses and profit sharing are being scaled back. The financial hardship associated with rising employee costs is top of mind – and not sustainable for many people.”
The Towers Perrin Health Care Cost Survey has been providing the industry’s most in-depth, prospective (versus retrospective) look at health care costs for employers for more than 20 years. The 2010 database includes detailed information on the health benefit programs provided by approximately 300 of the nation’s largest employers. These companies provide health care coverage to 5.2 million U.S. employees and dependents, collectively spend $29.4 billion on health care every year and, as such, represent a significant force for change in the health care marketplace.
Analyzing the 2010 data by coverage level, the average reported cost of medical coverage is $5,124 annually ($427 per month) for active employee-only coverage, $10,500 annually ($875 per month) for employee-plus-one-dependent coverage and $15,084 annually ($1,257 per month) for family coverage (Exhibit 2).
As in years past, survey results show that employers continue to shoulder most of the burden. However, despite ongoing employer support, the affordability gap for employees continues to grow as wages lag significantly behind health care cost increases (Exhibit 3).
Health Care Reform Looms Large
Will health care reform alleviate the growing affordability challenges facing both employers and employees? Data from the 2010 Health Care Cost Survey, as well as other recent Towers Perrin studies, suggest that reform, as evolving, has the potential to actually increase the cost burden for employers and that those additional costs would be passed on to employees, further widening the already pronounced affordability gap.
For example, one of the most recent – and controversial – provisions of reform proposed by the Senate Finance Committee is an excise tax that would apply, beginning in 2013, to health programs with combined coverages (medical, dental, vision, flexible spending accounts, etc.) valued at more than $8,000 per year for individuals and $21,000 for families. Although these caps sound high, as Exhibit 4 shows, more than 50% of companies will hit the caps within the next three years if current cost trends continue, and the impact of the caps will increase over time, even with indexing on the tax thresholds after 2013.
“Given that employer health care costs have increased approximately 150% over the last decade, it’s not surprising that companies are nervous about reform efforts with the potential to increase costs even further. In fact, our recent health care reform survey found that nearly half of employers believe that a pay-or-play mandate would have a negative impact on their business,” said Guilmette. “Furthermore, our reform survey showed that very few companies – a mere 11% – were willing to absorb higher health care costs by accepting reduced profits. For many of them, any reform-related cost increases would result in benefit cuts – and higher costs for employees and even customers.”
Another potential impact of health care reform could be further increases in the prevalence of account-based health plans (ABHPs). To reduce their costs, many employers in recent years have adopted ABHPs, which feature tax-favored savings opportunities for employees. Because these plans have lower actuarial value than traditional health plans, they could actually help employers delay hitting excise tax cap limits by up to two years.
ABHPs Continue to Gain Ground
Employer adoption of ABHPs has risen significantly over the last five years, from 20% to 60% of companies, as employers recognize and embrace the value of these plans in controlling their health care costs and reducing the employee affordability gap.
These plans provide both employers and employees with a clear cost advantage. Premium costs for a traditional ABHP are $8,927 per employee annually, which is 13% less than the average traditional plan and unused account funds roll forward to defray future out-of-pocket costs. And as noted, the lower cost of these plans also provides employers with a solution to hold family benefit values below the proposed $21,000 excise tax cap.
Because these programs are fundamentally different from traditional plans, however, employers have had varying degrees of success with them. High-performing companies , in particular, have had more success meeting their objectives:
- 55% of high performers – versus 32% of low performers – say their ABHPs are successfully controlling employer costs.
- 48% (versus 20%) say their ABHPs are successfully controlling employee costs.
High Performers Achieve Financial Advantage, Insulation From Reform Cost Hikes
As in previous years, the Towers Perrin Health Care Cost survey identified wide variations in the costs faced by high- and low-performing companies. With the performance analysis now in its fifth year, the 2010 survey data reinforce a consistently significant difference between health care costs facing high and low performers, with high performers paying 16% less – roughly $1,800 per employee – for their health benefit programs. This cost differential means that a high-performing organization with 10,000 enrolled employees would spend, on average, $18 million less annually than a low-performing competitor (Exhibit 5).
“This cost differential is very real, and has a significant impact on a company’s ability to compete, especially in today’s market,” said Guilmette. “What’s more, the impact of the cost differential extends beyond company expenses and revenue to employees, widening the affordability gap. Employees at low-performing companies will pay nearly 20% more for their health care in 2010.”
“In the current health care reform environment, high performers’ benefit management decisions would actually buy them significantly more time before they hit the proposed excise tax cap,” said Ron Fontanetta, Towers Perrin Principal. “And when combined with an ABHP, the cost advantage means high performers would be able to insulate themselves from the excise tax cap by four more years than their low-performing peers. High performers are poised to take full advantage of this benefit: Approximately two-thirds (67%) of these companies offer ABHPs, compared with just 40% of low performers.”
The survey revealed some other important characteristics that differentiate high from low performers, which point to future trends that all employers will begin to adopt to keep their costs down while continuing to deliver health care value.
- 76% of high performers – versus 50% of low performers – say they use measurement disciplines to build action plans for performance improvement.
- 51% (versus 21%) say they build connectivity across all their health-related programs and vendors.
- 88% (versus 62%) say their company views employee health as a critical component of superior business performance.
- 76% (versus 60%) say they’re committed to building a culture of health in their organizations.
- 85% (versus 54%) say their company promotes a culture of shared responsibility and accountability.
New Employer Actions Point to New Directions for Health Programs
With the convergence of ongoing cost increases and the growing recognition that new health management programs can slow and even reduce the rise of chronic disease, employers seem far more receptive to taking steps in new directions to evolve health care delivery in ways that better address these growing challenges. Furthermore, health care reform proposals evolving in Congress would support many of these new and innovative health care delivery platforms.
The data show employers adopting a range of bold changes aimed at influencing employee behavior and decision making, adopting leading-edge technologies and taking other innovative actions that hold the potential to disrupt – for the better – current delivery models. According to the survey, employers are eyeing a number of new directions including:
- Employee incentives. According to survey data, high-performing employers will, over the next few years, expand their use of incentives to engage employees in health and wellness initiatives, such as health risk assessments, wellness programs and biometric screenings (Exhibit 6).
- Behavioral economics. Employers are beginning to leverage the potential behavioral economics holds to improve consumer decisions about health and health care, with 15% of high performers using this innovative decision design model today and 48% expecting to do so by 2012 (Exhibit 7). Also expected to grow are related programs that promote good decisions and offer convenience as an incentive, including on-site biometric screening, promotion of healthy foods and access to retail clinics.
- Personalized health management and care delivery. Just as doctors are taking steps to personalize treatments to individual needs and preferences to improve outcomes, employers are moving toward segmenting their employee populations and using a broad range of personalized approaches to influence employee behavior and decision making. New directions in customization include:
- Using social networking to impact employee health and well-being. This personalized form of communication and influence is being used by 7% of high performers today, a group expected to more than quadruple in size by 2012 (Exhibit 8). Employers are also using blogs as a communication and connection tool today, with use expected to grow significantly over the next several years.
- Personalizing care delivery for better outcomes, including return to work. Examples include use of a health advocate to manage a chronic condition or serious illness, lifestyle coaching and integration of disability with medical care management (Exhibit 9).
- Leveraging technology innovations to improve health and engage consumers. New applications include personal health records – with use among high performers expected to double over the next few years, from 31% percent to 60%. High performers in increasing numbers also expect to adopt remote biometric monitoring as a way to involve employees in managing their health and improve the quality of care they receive (Exhibit 9).
- Evolving measurement disciplines. What employers are measuring offers insight into what they value, and the survey shows that they are increasingly defining the success of their health benefit programs in terms of the impact they have on workforce well-being, productivity and the overall health of the employee population. For example, high-performing companies expect to focus increasingly on employee health status and risk, gaps in care through ongoing review of medical claims and employee perceptions of well-being in the workplace (Exhibit 10).
- Provider incentives. One of the more surprising – and potentially transformational – survey findings is that employers are beginning to show an appetite for using provider incentives or penalties as a means of encouraging new health care practices with the potential to improve outcomes and reduce costs. And while employers’ use of provider incentives is happening only at the margins today, the data suggest that employers will be increasingly receptive to this approach, with current use expected to triple over the next few years.
“While large employers continue to work on health care demand through employee behavior change, they realize they can’t truly impact the underlying cost drivers without also addressing supply,” said Guilmette. “But few employers today can take on the provider payment model. They are instead waiting for government to take the lead and, when it does, they will be quick to follow.”
About the Survey
The Towers Perrin 2010 Health Care Cost Survey was conducted during August and September 2009. Participants were asked to report their 2010 per capita premium costs for insured health and dental plans and premium equivalents (i.e., estimated benefit and administrative costs) for self-insured plans. Survey respondents represent primarily Fortune 1000 companies with operations in numerous locations nationwide. Health programs sponsored by the approximately 300 participating companies cover 5.2 million U.S. employees and dependents, and cost $29.4 billion annually.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia, New Zealand and the Middle East. More information about Towers Perrin is available at http://www.towersperrin.com/hrservices.