Early responses from a Mercer survey suggest the average growth in U.S. health benefits costs will slow to 5.4% in 2012, the smallest increase since 1997. However, cost growth remains well above both general inflation and growth in workers’ earnings.
While this increase reflects cost-cutting changes employers plan to make to their benefits programs, such as raising deductibles or moving employees into lower-cost health plans, the preliminary findings suggest the underlying trend has slowed as well. Asked how much costs would rise if they made no changes to their current plans, employers reported an average increase of 7.1%. Over the past five years, this underlying health benefits cost trend has been running at about 9%.
The slower trend is good news for workers, because an employer’s first line of defense against a high initial renewal rate is to change plan provisions so that employees pay more out of pocket for healthcare. If the underlying trend is lower to begin with, employers will be likely to shift less costs. For the past several years, employers have reduced their initial renewal rate by about 3 percentage points on average; in 2012, they are planning to reduce it by about 2 points.
Understanding the slower cost growth for 2012 means looking at the factors working to hold down the underlying trend along with the actions employers are taking to reduce costs next year. Use of health services, which slowed this year, is one such factor. Some analysts believe the tough economy, combined with generally higher deductibles and other forms of cost-sharing, is affecting utilization—that because employees have less disposable income and are working longer hours, they are less likely to seek non-urgent care.
On the other hand, Susan Connolly, a partner in Mercer’s Boston office, believes that slowing utilization may also be a sign that programs targeted at improving employee health—now the rule rather than the exception in benefits programs—are having a positive impact.
“Earlier risk identification and health education, along with improvements in drug therapies and medical technology, are keeping people with health risks and chronic conditions away from the emergency room,” says Connolly. “And consumers are more aware that overuse and misuse of healthcare services will directly impact their wallets as well as their employer’s budget.”
Employer cost management tactics for 2012
While the underlying cost trend may slow in 2012, an increase of more than 7%—twice the rate of general inflation—is still higher than many employers are willing or able to absorb. Some plan to shift costs to employees by raising premium contributions in 2012. They are somewhat more likely to increase contributions for dependent coverage (36%) than for employee-only coverage (33%). The difference is greater among the largest employers (42% will raise dependent contributions and 36% will raise employee-only contributions); they may be attempting to compensate for enrolling more dependents under the U.S.’s health reform law’s stipulation that employees’ children up to age 26 be eligible for coverage.
About a third of the survey respondents (33%) say they are raising deductibles or co-payments in 2012. The past five years have seen employers increasingly using this type of cost-shifting, driving the median preferred provider organization (PPO) deductible for an individual to $1,000 among small employers (those with 10 to 499 employees) and to $500 for large employers last year.
One way employers can give employees a stake in their healthcare spending is with consumer-directed health plans (CDHPs). These are high-deductible plans with an employee-controlled spending account—a health savings account (HSA) or health reimbursement arrangement (HRA). Many of these plans give employees an incentive to take costs into consideration when seeking healthcare services by allowing them to save, on a tax-advantaged basis, account dollars they don’t spend in a given year for future needs. Preventive care is covered in full.
“We’re expecting to see a spike in 2012 in both the number of employers offering CDHPs and in the number of employees enrolling in them,” says Beth Umland, Mercer’s director of research for health and benefits. “Employers see them as a way to provide more value to employees while at the same time managing cost.”
CDHPs are significantly less expensive than traditional PPOs—by about 15%, on average. The use of CDHPs has been growing steadily over the past five years, particularly among the largest organizations. In 2010, offerings of CDHPs ranged from 14% among employers with 10 to 49 employees to 51% among those with 20,000 or more employees. Survey results suggest there will be an increase in offerings of these plans in 2012: 18% and 58% of the smallest and largest survey respondents, respectively, say they plan to offer a CDHP in 2012.
“While 2012’s slower cost growth is welcome news, it’s still higher than the CPI—which means employers won’t be letting up their efforts to control costs anytime soon,” says Connolly. “Advanced strategies like limited provider network plans and more intensive employee education and engagement will continue to evolve.”