Two recently-released healthcare studies indicate that the rise in employer-provided healthcare coverage costs is part of a long-term trend, and that employers are taking affirmative steps to counter this escalation.

The first survey, conducted by the Mercer consulting firm, suggests that while healthcare costs have increased over the years, the pace of this rise is slowing. Mercer’s 2011 National Survey of Employer-Sponsored Health Plans analyzed the responses from 2,844 employers with at least 10 employees in both the public and private sector. Among other findings, the survey found that the increase in average per-employee health benefit cost declined in 2011 to $10,146, and is projected to drop even more in 2012. Mercer found that the average per-employee cost increase for 2011 was 6.1%, down from 6.9% in 2010, and estimates that the growth in average healthcare costs per employee will be approximately 5.7% in 2012.

Larger employers reported a smaller increase in their healthcare costs (3.6%) than smaller employees (9.9%). This disparity is likely due to the fact that larger employers typically already offer more generous health benefits to their employees that meet the Affordable Care Act’s standards. Compliance with the new requirements, therefore, is less burdensome for these employers than for smaller employers. According to Mercer, smaller employers are also less likely to institute wellness programs and other proactive means of containing costs.

Notably, approximately one-third of responding employers did not maintain a grandfathered health plan in 2011. Of those employers that still maintained such plans, 18% believed that the plans would lose their grandfathered status by 2014.

Despite the increase in healthcare costs, most employers indicated that they will continue to offer healthcare coverage as a benefit in 2014 when many of the Affordable Care Act requirements take effect. The larger the employer, the less likely they were to claim they will drop coverage. Only 4% of employers with 5,000 or more employees, and 9% of employers with 500 or more employees claimed that they are “likely” or “very likely” to terminate their plans in 2014. Smaller employers (those with between 10 and 499 employees) appeared more inclined to abandon their plans in 2014, although the number of these employers who indicated they would drop coverage did decrease in 2011. Of employers in this group, 19% (down from 20% in 2010) stated that they will be likely or very likely to drop coverage once the insurance exchanges are operational and the additional coverage requirements take effect.

Biggest Concerns

The healthcare reform law will institute a number of new health coverage requirements. According to the survey, employers responded that the change that concerns them the most is the imposition of a 40% excise tax on high-cost “Cadillac” insurance plans, slated to take effect in 2018. Forty-eight percent of surveyed employers claimed that this change is a “significant” or “very significant” concern. In contrast, only 10% of those surveyed stated that the requirement for employers with 50 or more employees to extend coverage to all employees who work an average of 30 hours per week in a given month is a “significant” concern, while 12% deemed this requirement a “very significant” concern.

Cost Containment

The continued rise in healthcare costs combined with changes instituted by the healthcare reform law have led many employers to ramp up their efforts to keep healthcare expenses in check. Among other employer tactics for doing so is the provision of consumer-directed health plans (CDHPs). Under these high-deductible plans, employees purchase healthcare services directly through Health Savings Accounts (HSAs) or Health Reimbursement Arrangements (HRAs). According to Mercer, these plans are approximately 20% less costly than providing PPO or HMO coverage. Per employee, the average cost of providing CDHP coverage is $7,787 per employee, versus $9,385 per employee for PPO coverage, and $9,467 for HMO coverage.

The survey found that 13% of employees are enrolled in such plans, up from 3% five years ago. The larger the employer, the more likely they are to offer CDHPs as a healthcare plan option. Specifically, in 2011, 47% of the largest employers (those with 10,000 or more employees) offered CDHPs; 32% of large employers (those with 500 or more employees) offered such plans; and 20% of employers with less than 500 offered CDHPs as an option.

Offering wellness programs is another common cost-containment measure. The survey results indicate that 87% of large employers intend to add or strengthen their wellness programs to encourage participation. For 2011, the survey found that 33% of large employers with established wellness programs provide incentives or penalties to participate. This percentage jumps to 52% for employers with 10,000 or more employees. The most common incentive offered was a reduction in premium contribution costs.

In addition, the survey found that many employers may switch to self-funding to contain costs. The survey results show that one-third of employers with 500 or more employees that have a fully-insured PPO believe they are likely to opt for self-funding by 2014. Smaller employers, however, claimed that they are less likely to switch to the self-funding option.

With respect to coverage, fewer employers are offering coverage for Medicare-eligible retirees, while coverage for domestic partners is on the rise.

More information on the Mercer survey can be found here.

2003-2010 Cost Trend

A separate report (pdf) the Commonwealth Fund released the same day as the Mercer survey also analyzed the rise in employer-sponsored healthcare costs. Specifically, the report – State Trends in Premiums and Deductibles, 2003-2010: the Need for Action to Address Rising Costs – found that during this time period the average premium cost for family coverage increased 50%, and the employee’s annual share of premium costs increased 63%. Meanwhile, the study found that on average, single-person deductibles for private-employer health plans increased by 98 percent during that seven-year period. Notably, the time period covered by the study ended before the Affordable Care Act was enacted, reflecting that the rise in healthcare costs was years in the making. In the absence of the Act, the report projected that the average premium for family coverage would continue to rise 72% by the year 2020, to nearly $24,000.

The report claimed that the new healthcare law includes “several significant coverage and delivery system reform provisions that could help moderate premium growth, make premiums more affordable, and provide improved financial protection for insured individuals and families who have benefit gaps, high deductibles, or limits on covered medical care expenses.”

Such measures include the requirement that beginning in August 2012, health plans in the large-group market spend at least 85 percent of their premiums on medical care or services, and health plans in the small-group and individual markets spend at least 80 percent on medical care or services, or offer rebates to their enrollees. These requirements are intended to force insurers to reduce their administrative costs. In addition, the law mandates that insurers justify any “unreasonable” insurance premium increases.

In order to further reduce cost and improve affordability in the future, however, the report stated that reform must target the “underlying factors contributing to high and rising costs,” such as the nation’s “highly fragmented” insurance system.

The report included a state-by-state analysis of healthcare cost trends. More information on this report can be found here.

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