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Early estimates of cost impact range from moderate to severe, with 30% of employers surveyed still in the dark
Even so, the excise tax on high-cost plans – which doesn’t kick in until 2018 – tops employers’ list of concerns
Retailers concerned about cost of expanding coverage to more part-timers
Employers considering several options for offsetting cost of covering adult children
Many employers are bracing for higher health care costs resulting from compliance with health reform mandates that take effect with the 2011 plan year. According to a survey of nearly 800 employers released today by Mercer, the cost impact will range from moderate to severe, depending on the employer’s circumstances.
Mercer surveyed 791 employers this month about whether they expect Patient Protection and Affordable Care Act (PPACA) rules will cause costs to rise in 2011, and if so, by how much. One-fourth of respondents said that compliance with the first round of PPACA mandates will add at least another 3% to their projected 2011 plan costs, with about one in ten expecting an additional 5% or more. About two-fifths (42%) predict a relatively modest increase of 2% or less, and 3% said their plans were already in compliance and would see no cost increase. The remaining 30% could not estimate the impact (Figure 1).
“Average health benefit cost per employee has been rising consistently at about 6% for the past five years,” said Tracy Watts, a consultant in Mercer’s Washington, DC, office. “That seems to be employers’ threshold of pain. If compliance with health insurance reform pushes the cost increase up toward double digits, employers will be exploring ways to bring it back within their comfort zone.”
Employers’ #1 concern: excise tax on high-cost plans
The survey asked employers about their level of concern over six major provisions of PPACA. The excise tax on high-cost plans, which takes effect in 2018, emerged as their top concern despite the fact that it is the last provision to be implemented (Figure 2). While other provisions hit from 2011 through 2014, the excise tax poses a significant or very significant concern for 29% of the survey respondents (an additional 29% say it is “a concern” while 42% say it is either not an issue or only a very slight concern).
“Employers who rely on generous medical benefits to help attract and retain top employees are concerned about the excise tax,” said Ms. Watts. “And let’s not forget that there are reasons other than richness of benefits that drive up cost, such as having an older population or being located in a high-cost metropolitan area – both factors that are not under an employer’s control.”
Two provisions going into effect in 2011 – expanded coverage for older children and a ban on the use of lifetime benefit dollar limits – are each a significant concern for about a fifth of employers.
The requirement that employers auto-enroll new hires into a health plan, is a significant concern for 16% of respondents. Most – 88% – currently do not automatically enroll new hires in a plan (Figure 3). Making this change could result in more employees joining the plan.
Employers are already considering how to manage the cost of the auto-enrollment requirement. About 43% of the survey respondents say they will strongly consider using their lowest-cost plan as the default (another 23% only offer one plan). A fifth of the employers say they are strongly considering imposing the maximum allowable waiting period – 90 days – before enrolling new hires (Figure 4).
Retailers particularly concerned about cost of covering more part-time workers
The rule that employers must offer “affordable” coverage to all employees working an average of 30 hours or more a week in a month (or else be subject to penalties) is a significant concern for 24% of respondents in the retail industry, which relies heavily on part-time labor. This compares to just 11% of survey respondents overall.
Among the 26% of respondents that currently don’t offer coverage to all employees working 30 or more hours per week (and thus may not be in compliance with this rule when it goes into effect in 2014), one-fifth say they will strongly consider changing their workforce strategy so that fewer employees work 30 hours or more a week (Figures 5 & 6). Some (16%) say they will strongly consider adding a lower-cost plan for these newly eligible employees rather than adding them to an existing plan for full-time employees. Interestingly, only 8% say they would seriously consider making no or minimal changes to increase the number of eligible employees and instead pay the required penalty.
Few employers will cover adult children before required to do so
News that some insurance companies voluntarily agreed to provide dependent coverage to the adult children of subscribers without waiting for the PPACA requirement to take effect was met with enthusiasm by many high school and college seniors and their parents. Under most policies, children lose their eligible-dependent status upon graduation, although they have the right to elect COBRA continuation coverage. Only 6% of survey respondents currently extend coverage to dependent children up to age 26 (Figure 7).
While insurers may have felt pressure to comply early, employers are not so eager to pay an unplanned expense. Only about one-fourth of the survey respondents that don’t already cover children up to age 26 say they are likely to begin before their next renewal, which for most plans is January 2011 (Figure 8). Large, self-insured employers are even less likely to act before they have to: Among respondents with 5,000 or more employees, just 17% say they are likely to implement the rule early.
Most of the insurance companies that are extending dependent eligibility immediately are giving their group plan customers 30 days to opt out, and the survey results suggest that most employers will choose to wait.
“It’s easy to see why employees want this provision to go into effect now,” said Ms. Watts. “But this change is a pretty big deal for employers, with new notification requirements, employee communication and tax implications. Not to mention that it would be an immediate, unbudgeted business expense.”
Whenever they implement the rule, employers are considering a number of possible actions to take to offset the increased cost that adding dependents can bring. About half of surveyed employers would seriously consider requiring proof that dependents do not have coverage available to them through their own employers. A fifth would seriously consider changing contribution rate tiers – for example, from just two rates for employee-only and family coverage, to four or more rates based on the number of dependents covered, shifting the additional cost to employees covering the most family members. Others (16%) say they are likely simply to require higher contributions for all dependent coverage (Figure 9).
“While each of these new rules that adds administrative burden has the potential to increase cost, employers have certainly had to cope with compliance challenges in the past,” said Beth Umland, Mercer’s research director for health and benefits. “Nothing in our survey results suggests that they’re about to scrap their health plans and head for the hills.”
Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit mercer.com.