Employers’ See Smallest Healthcare Cost Increases in 15 Years

In 2012, employers saw the lowest average annual cost increase in healthcare costs since 1997, according to a Mercer survey. Growth in the average total health benefit cost per employee slowed from 6.1% last year to just 4.1% in 2012. Cost averaged $10,558 per employee in 2012. Large employers (500 or more employees) experienced a higher increase (5.4%) and higher average cost. Employers expect another relatively low increase of 5% for 2013. However, this increase reflects changes they plan to make to reduce cost; if they made no changes, cost would rise by an average of 7.4%.

“Over the past decade, employers have figured out how to stabilize cost increases for health benefits through cost-shifting and other cost management techniques. Now we’re seeing a move toward even greater control through defined contribution strategies,” says Sharon Cunninghis of Mercer.

Employers have been moving more employees into low-cost consumer-directed health plans and beefing up their health management programs. Julio Portalatin, president and CEO of Mercer said, “Employers are very aware that, in 2014, when the health reform law’s provisions kick in, they will be asked to cover more employees and face added cost pressure. They’ve taken bold steps to soften the impact and it’s paying off already.”

Success in controlling cost growth in recent years may be contributing to employers’ commitment to providing health coverage. Few expect to terminate their employee health plans in the next five years even though state-based health insurance exchanges will provide another source of health coverage for individuals beginning in 2014. Just 7% of large employers and 22% of small employers (10 to 499 employees) believe it is likely or very likely that they will do so.

In fact, there was a slight increase in the percentage of employers offering coverage in 2012: it rose from 55% to 59% after falling in each of the previous two years. Most of the increase was among the smallest employers (10 to 49 employees), which are the least likely to offer coverage and the quickest to drop it when cost goes up.

Employee enrollment jumped from 13% to 16% of all covered employees in 2012 with a growing number of employers now positioning a high-deductible, account-based consumer-directed health plan as their primary plan or even their only plan. Many employers see these plans as central to their response to health care reform provisions that will raise enrollment. Over the past two years, offerings of CDHPs have risen from 17% to 22% of all employers and from 23% to 36% of employers with 500 or more employees.

Fifty-nine percent of very large organizations (20,000 or more employees) now offer a CDHP. “If we’re not already at the tipping point for CDHPs – and we may well be – at this rate of growth it’s coming soon,” says Cunninghis.

Moving even a small number of employees out of a more expensive plan into a CDHP can result in significant savings for an employer. The cost of coverage in a CDHP with a health savings account is about 20% lower, on average. While employers have been reluctant to offer the CDHP as the only medical plan, attitudes are shifting. Eighteen percent of large employers expect to offer a CDHP as the only plan, up from 11% in 2011. Average enrollment rose from 25% to 32% among large employers that offer an HSA-based CDHP.

The ACA requires that health plans cover, at a minimum, 60% of eligible health plan expenses. Some employers are resetting their health plan value to move closer to that minimum, and saving money as a result. Some employers are offering a lower-cost CDHP in 2012 while others simply raised the deductible of an existing PPO plan. The average PPO in-network deductible reached $1,427 for an individual in 2012. Although large employers typically require much lower deductibles, the average deductible among employers with 500 or more employees rose by about $80 in 2012, to reach $666.

An example of a defined contribution strategy is determining the employer’s contribution to the cost of coverage and requiring employees to pay anything above that amount. Employees can save money by choosing a lower-cost plan. Forty-five percent of the employers say they use or are considering using a defined contribution strategy.

Offering a wellness plan has emerged as an employers’ top long-term strategy for controlling health spending. Seventy-eight percent of large employers say that senior leadership is supportive of health management programs to encourage more health-conscious behavior.

Most employers believe that health management programs are making a difference, but proving the return-on-investment (ROI) remains a challenge. The largest employers are the most likely to have measured the ROI of their health management programs (53% of employers with 20,000 or more employees). More than three-quarters of those say that their programs have had a positive effect on medical plan trend.

Forty-eight percent of large employers with health management programs provided financial incentives or penalties, up from 33% last year. When non-financial incentives (recognition, gifts or lotteries) are included, this figure reaches 54%. In 2012 18% of large-employer health management programs include incentives for achieving, maintaining, or showing progress toward specific health status targets. These incentives were rare in 2011.

With the future of health reform secured by the re-election of President Obama, employers will be focusing on the next generation of cost management strategies. One approach that is increasingly in the spotlight is the use of private exchanges, a private-sector alternative to the state health insurance exchanges. Private exchanges give employers a way to offer employees a broader choice of benefits while allowing carriers to compete for their business and manage their risk. Fifty-six percent of employers would consider a private exchange for active or retired employees.

The use of high-performance (or narrow) provider networks rose from 14% to 23% in 2012 among very large employers (5,000 or more employees) while the use of surgical centers of excellence rose from 18% to 35%. There was also strong growth in the use of medical homes (from 3% to 9%), which also promise to save money by improving care.

Twenty four percent of large employers offer an ongoing plan to retirees under age 65 and just 17% offer a plan to Medicare-eligible employees, which is essentially unchanged from 2011. An additional 15% stopped offering a plan for which new hires will be eligible, but they continue to offer coverage to a closed group of employees retiring or hired before a specific date.

Forty-seven percent of large employers include same-sex domestic partners as eligible dependents, up from 39% in 2010. This varies significantly based on geographic regions, from 73% of employers in the West to 30% in the South.

Very large employers are adopting special provisions concerning spouses of employees with other coverage available. In 2012, 18% of employers with 5,000 or more employees had such a provision in place, up from 15% in 2011. They imposed a surcharge for spouses with other coverage available (14%) or denied them coverage entirely (4%).

Nineteen percent of large employers vary the employee contribution amounts based on tobacco use status or provide other incentives to encourage employees not to use tobacco – up from 17% in 2011. Growth was especially strong among very large employers: 46% of employers with 20,000 or more employees now use an incentive, up from just 35% in 2011. For more information, visit www.mercer.com.

Last Updated 7/11/2017

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