Human Capital & Careers

Health-Care Cost Hikes Stay Modest for Big Companies

The average company with more than 1,000 employees will pay 4.4 percent more in 2014 than it did last year, new research says.
David McCannMarch 7, 2014
Health-Care Cost Hikes Stay Modest for Big Companies

The rate of increase in large employers’ health-care costs is expected to tick up slightly in 2014, ending a four-year slowdown in cost growth.

So say the results of a closely watched annual survey released Thursday by the National Business Group on Health (NBGH) and Towers Watson. For large companies, costs will rise this year by an average of 4.4 percent. While that’s higher than the 2013 rate of 4.1 percent, it remains a historically low figure (see chart below). The popular notion that health-care costs are spinning wildly out of control is, today, a fiction, at least for large companies.

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The underlying cost trend for this year is actually an increase of 7 percent, according to the survey, which included responses from 595 companies with at least 1,000 employees. But the average large company will bring that down to the 4.4 percent level by taking steps like redesigning its plans (for example, increasing employees’ deductibles and copayments) and lowering plan contributions. The share of costs borne by employees, including premiums and out-of-pocket costs, has inched up from 34.4 percent in 2011 to 37 percent this year, the survey report notes.

This year’s minimal acceleration in corporate cost growth carries a caveat: much or all of it may be attributable to some costs related to the Affordable Care Act (ACA). The big one is the new transitional reinsurance tax meant to defray the government’s costs of setting up and subsidizing the new public health-insurance exchanges. In 2014 all companies (both self-funded and fully insured ones) will pay $63 for every employee and dependent covered under an employer-sponsored health plan. [contextly_sidebar id=”18a84811a177076b51e6c0593138fb27″]

“That’s a significant expense for a large employer and may account for a one-half percentage-point increase in cost growth,” says Randall Abbott, a senior health-care consultant with Towers Watson. Also, after a phase-out schedule that started in 2010, this will be the first year there can be no annual or lifetime dollar limits under health-insurance policies.

At 4.4 percent, health-care cost hikes are well more than double the current inflation rate of about 1.6 percent. That’s hardly a new trend. “For the last 30 to 40 years, health costs have always run about two to two-and-a-half times the rate of general inflation,” says Abbott. “And I don’t think we’ll see the medical [cost] trend nearing the inflation rate anytime in the near future.”

But that doesn’t mean individual companies can’t get there. According to the survey report, “best-performing” companies, defined as those that maintained cost increases at or below the medians in the annual NBGH/Towers Watson surveys for four consecutive years, saw such increases average just 1.6 percent from 2010 through 2013.

Some such companies are supersized and wield immense negotiating leverage. But smaller employers in the 1,000-and-over category, and some even smaller than that, may increasingly have access to cost-saving avenues laid out by the same Affordable Care Act that doled out new fees and costs over the past few years. If the ACA has taken something away, over time it may give back more.

“This is a really important point for CFOs,” says Abbott. “The ACA legislated the availability of five new reimbursement methods for providers of care like doctors and hospitals. They are value-based. Rather than paying just a discounted unit cost for care delivered, they modify payments based on the efficiency of care, quality of care and patient outcomes.”

These payment models were initially aimed at the Medicare market but are now being expanded into the commercial marketplace. Right now, only about 10 percent to 20 percent of reimbursements under most employer plans are value-based, says Abbott. But that number is increasing rapidly, and Towers Watson estimates that by 2015 it will be as much as 30 percent to 35 percent.

“This is a big part of health-care reform,” says Abbott. “It heralds a shift from a pure discount reimbursement arrangement, where CFOs’ focus is all on what discounts they can get from health plans and providers. Going forward, you can lean toward giving your business to the plans and providers that are embracing and pursing the new payment methods.”

In looking at various health-plan options, CFOs should insist on getting complete answers to “how your efficiency influences the contracting rate, how you’re monitoring outcomes, how you’re managing quality and how providers are recognized and rewarded for doing those things.”

Here are some other notable survey findings:

• While 95 percent of respondents reported that their health-benefits plans are an important part of their total rewards value proposition for employees, only 25 percent said they were “confident” their companies will offer employee health coverage in 10 years.

“That’s the lowest that number has ever been, but if you think about the current landscape it’s not very surprising,” says Abbott. “We don’t know what’s going to happen with legislation, or with the excise tax [slated to be imposed on employers with too-rich plans starting in 2018], or with employers’ tax deductions for health care as the government faces budget challenges, or how successful the public exchanges will ultimately be, or how these new private exchanges are going to fall out.”

• Companies continue to discourage spouses from signing up for health insurance. This year 49 percent of survey respondents said their employers charge more per person for dependent coverage than employee-only coverage, and an additional 15 percent plan to do so in 2015. Also, 24 percent of survey participants assess an enrollment surcharge against spouses who have access to other employer-based coverage, and 15 percent more expect to do so next year.

“The cost of covering spouses is significant, and employers have been reconciling their premium allocations against true claims costs to make sure they’re covering the spouse costs,” says Abbott.

• Adoption of outcomes-based wellness incentives is gaining steam, and fast. For 2014, 22 percent of the surveyed companies stipulated that financial and other incentives be based on more than simply participation in a wellness program. That number is expected to reach 46 percent next year.

“Historically employers have expected very little accountability from their employees when it comes to wellness programs,” Abbott says. “The outcomes-based approach says, ‘To get the money, you’ve got to demonstrate that you’re achieving results — that you are actually losing weight or stopped smoking or reduced your cholesterol.’ That is a step in the right direction.”