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A few new rules and a flurry of surveys create a clearer picture of health-care costs in 2011.
Alix Stuart, CFO.com | US
May 24, 2010
Piece by piece, CFOs are getting a clearer understanding of how health-care reform will affect their costs. According to a recent survey by Mercer, 41% of companies expect to see their annual costs increase by 2% or less when the Patient Protection and Affordable Care Act's most immediate provisions — expanded dependent coverage and the end of lifetime coverage limits — take effect next year. Another 25% expect the provisions to add 3% or more to the tab, while a fortunate 3% expect no changes as a result of the required benefits enrichment. (Thirty percent are still unable to tally the additional costs.)
One component of those cost increases will come from the PPACA's mandate to extend coverage to older children of employees. New interim rules from the Departments of Health and Human Services, Labor, and the Treasury recently clarified that companies providing health insurance must offer the coverage to those age 26 or under in new plan years starting on or after September 23, 2010. They also made it apparent that implementing even one of the less-controversial provisions of the bill will not be easy work.
"You would think that just extending [coverage] to age 26 is simple, but it's really not, since there are so many other layers behind it," says Dean Hatfield, senior vice president and national health practice leader for Sibson Consulting.
Indeed, only 16% of companies are choosing to adopt the new regulations early, according to a Towers Watson study, despite the fact that the timing will leave some graduating students without coverage for months. "Even though it's just one change to the benefit program, with it comes communications needs, adjustments to payroll, time, and resources," says Randall Abbott, senior consultant with Towers Watson. "Most employers would rather just wait and roll this into their fall open-enrollment session."
Besides the additional resources required for such adjustments, Towers Watson estimates extending coverage will create an increase of 0.5% to 1% in overall premium costs.
Among the biggest shifts: the rules expand the definition of a dependent child, which employers use to determine which children are covered by a health plan, says Abbott. Before, employers generally covered only children who were unmarried, living with their parents, or else enrolled as students, hewing to the Internal Revenue Service's definition of a dependent. Now, any child age 26 or under, married or single, living at home or not, is eligible for coverage.
Companies must also decide whether they want to offer dependent children some ancillary benefits, such as vision or dental insurance. The new law does not require it, but Abbott says that for administrative ease, "large employers are generally planning to extend" such benefits to newly eligible children. Companies that offer coverage to grandchildren will also have a choice about whether to extend that coverage to those up to age 26, another decision that may be driven by administrative ease.
Paying for the change may also encourage some changes in plan design. Companies will not be allowed to charge employees extra for additional dependents based on their age, but they can tier the rates based on the total number of dependents. Few companies do so today, says Abbott, but more are considering it.
The impact of the other major change coming in 2011 — the end of lifetime maximums on coverage — is somewhat less clear. It could create big changes in the insurance market, particularly in the stop-loss market that insures companies for medical claims over a certain amount, says Hatfield, since employers will now have to choose an upper coverage limit. Regulations regarding the insurance providers are not yet clear, however. "When the details of the law start coming out, then you can be very creative as to how to position yourself to maintain competitive benefits in the new environment, as the whole risk balance has changed," says Hatfield.
Meanwhile, employers say their top worry is not the change to dependent-child or lifetime coverage, but rather the so-called Cadillac excise tax that is slated to take effect in 2018 — a 40% tax on annual premiums exceeding $10,200 for individuals or $27,500 for families. According to Towers Watson data, more than 60% of large employers will hit those thresholds by 2018, assuming an 8% annual increase in health-care costs.