Employers Get Aggressive to Control Health Costs

News Updates


Large U.S. employers expect a 4 percent increase in 2015 health care costs for current employees after plan design changes and a 5.2 percent rate increase without plan adjustments, according to Towers Watson’s 2014 Health Care Changes Ahead Survey.

The survey was completed during the summer of 2014 by 379 employee benefits professionals from midsize to large companies across a variety of industries. Initial findings were released in September.

Tower Watson’s cost projections were a bit lower than those in an August report by the National Business Group on Health, which forecasts that health benefit expenses at large U.S. employers will increase 5 percent on average after plan designs are revised and 6.5 percent without plan adjustments. A June forecast by PricewaterhouseCoopers projected that medical inflation in the U.S. would rise to 6.8 percent in 2015.

The Towers Watson report indicates that despite a cost trend that continues to outpace general inflation, most employers (83 percent) consider health benefits an important element of their employee value proposition and plan to continue subsidizing them for both full-time and part-time current employees.

Employers are, however, continuing to rethink company subsidies for spouses and dependents.

Of particular concern on the cost front is the Affordable Care Act’s 40 percent excise tax on high-value plans, which goes into effect in 2018. The survey revealed:

  • Nearly three-quarters (73 percent) of employers said they are somewhat or very concerned they will trigger the tax based on their current plans and cost trajectory.
  • More than four in 10 (43 percent) said avoiding the tax is the top priority for their health care strategies in 2015.

As a result of the excise tax and other provisions of the health care reform law, two-thirds of CEOs and CFOs are more directly involved in developing their company’s health benefits strategies. “CFOs are now focused on a new gold standard: managing health cost increases to the Consumer Price Index,” said Randall Abbott, senior consultant at Towers Watson, in a news release. “This requires acute attention to improving program performance.”

Cost-Curtailing Steps

A growing percentage (81 percent) of employers plan moderate to significant changes to their health care plans over the next three years, up from 72 percent a year ago, Towers Watson found. Among the actions being planned to curb spending in 2015 are:

  • Specialty pharmacy management to rein in prescription drug costs, which are expected to increase by 5.3 percent after plan changes (6 percent before changes). Related actions include using step therapy that tries less expensive medications first, requiring prior authorizations and shifting more of the cost of high-tier drugs to workers.
  • Telemedicine for virtual physician office visits to improve access and efficiency of care delivery.
  • New payment approaches that hold providers accountable for the cost of an episode of care and health outcomes.

Longer term, between now and 2017, the survey found that:

  • Offering an account-based consumer-directed health plan (CDHP)—typically a high-deductible plan with a health savings account or health reimbursement arrangement—as the only plan option could be in place at 50 percent of companies. Today, 17 percent offer only a CDHP, another 4 percent intend to do so for 2015, and another 28 percent are considering it for 2016 or 2017.
  • Nearly half (48 percent) of employers are considering tying incentives to reaching a specified health outcome such as biometric targets, compared with just 10 percent that intend to adopt it in 2015.
  • 37 percent are considering offering plans with a higher level of benefit based on the use of high-performance or narrow networks of medical providers, compared with just 7 percent in 2015.
  • One-third (34 percent) of employers are considering using telemedicine, compared with 15 percent in 2015, further accelerating technology as a way to improve engagement and medical care access as well as to manage costs.
  • Three out of four employers (76 percent) are exploring the use of personalized digital technologies, including mobile health applications and fitness wearables as well as social media to encourage greater activity among employees.
  • The importance of data and metrics to evaluate health care benefit program performance is growing, with 60 percent of respondents planning to emphasize data as a gauge of performance.

Spouses and Dependents Face Cuts

Another cost-mitigation tactic being considered for 2016 and 2017 is introducing changes in how employers subsidize health care for spouses and dependents. The survey revealed that:

• A third (33 percent) of employers are considering significantly reducing company subsidies for spouses and dependents.

• 10 percent have already implemented such reductions, and 9 percent intend to do so in 2015. In addition:

• 26 percent said they are considering spouse exclusions or surcharges if coverage is available elsewhere.

• 30 percent have that tactic in place now, and another 7 percent expect to add it in 2015.

Employers are also examining caps on health care coverage subsidies for current employees, using defined contribution approaches, with 30 percent of employers considering them for 2016 and 2017, 13 percent having them in place today, and another 3 percent planning them for 2015.

Private Exchange Interest Is Growing

With regard to private health insurance exchanges for current workers:

• 28 percent of employers said they have extensively evaluated the viability of private exchanges.

• Nearly one in four (24 percent) said private exchanges could provide a viable alternative for their current full-time employees in 2016.

The top three factors that would cause employers to consider a private exchange for full-time active employees are:

• Evidence they can deliver greater value than their current self-managed model (64 percent of respondents).

• Adoption of private exchanges by other large companies in their industry (34 percent).

• An inability to stay below the excise tax ceiling as 2018 approaches (26 percent).

Staying the Course

Despite the challenge of managing the high cost of health benefits, nearly all employers (99.5 percent) said they have no plan to exit health benefits for active employees and direct them and their families to public exchanges, with or without a financial subsidy. Three out of four employers (77 percent) said they are not at all confident public exchanges will provide a viable alternative for their active full-time employees in 2015 or 2016.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.


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