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The new health care reform law gives employers a choice: If they avoid making certain changes to their health plans – such as raising employee coinsurance requirements – their plans will be “grandfathered” and thus exempt from a number of new cost-sharing and coverage mandates. Interim regulations released in June estimated that between 67% and 85% of employer plans would retain grandfathered status in 2011, but a new Mercer survey of nearly 1,100 employers found that just 53% believe they are likely to retain grandfathered status for all their plans – a somewhat smaller percentage than the government’s lowest estimate (Figure 1).
For many others, however, the cost advantages of making changes to their plans outweigh those of avoiding some reform mandates. The survey asked employers about the cost impact of meeting the Patient Protection and Affordable Care Act (PPACA) requirements for 2011 – specifically, extending dependent eligibility to age 26 and removing annual and lifetime benefit maximums. Employers estimated that making the changes would add 2.3%, on average, to their 2011 cost. They predicted their cost would rise by a total of 10.1% – if they made no cost-saving changes.
For many employers, absorbing health benefit cost increases of this size is simply not an option. When asked for their targeted cost increase – the increase they hope to achieve after making such changes as switching plan vendors, raising deductibles and other cost-sharing provisions, or offering a different type of plan – employers estimated that they could hold the cost increase to 5.9%, on average (Figure 2).
Smaller employers – those with fewer than 500 employees – generally offer fully insured plans and predicted an underlying cost increase of nearly 12%, while large employers, which typically self-fund, predicted an increase of about 9% if they made no changes other than those required by PPACA. Still, small employers also expect to bring their cost increase down to 6%.
“Six percent seems to be employers’ collective comfort level,” said Beth Umland, Mercer’s research director for health and benefits. “For the past five years the actual cost per employee has risen by about 6% annually, even as the underlying trend has been running at about 9%. Employers have been working hard to keep it at that level, and they’ll have to work a bit harder in 2011 to achieve the same result.” (Figure 3)
Overall, 57% of survey respondents will ask employees to pay at least a somewhat greater share of the cost of coverage in 2011. Over half of these will increase the cost of dependent coverage proportionally more than the cost of employee-only coverage. This is likely a response to the expected increase in the number of dependents enrolled once employers must extend coverage to children up to age 26.
But raising employee contribution amounts doesn’t necessarily reduce health care spending; it just changes how cost is apportioned between the employer and employee. Many employers will be looking to reduce health care cost increases by improving workforce health: 44% of respondents say they will add health management or wellness programs or services in 2011, and 38% say they will add incentives for employees to participate in the health management programs already available to them. In fact, more respondents will attempt to curtail health care spending through new or improved health management programs in 2011 than through higher deductibles or other cost-sharing provisions (Figure 4).
“This is a surprising – and encouraging – finding,” said Tracy Watts, a Mercer partner based in Washington, DC. “In a year when employers are dealing with additional cost pressure from PPACA-related changes, they are continuing to invest in health management – and demonstrating their belief that these programs bring a return on investment.”
Avoiding cost increases versus maintaining grandfathered status
As noted earlier, about 53% of the employers surveyed think all their plans will retain grandfathered status. About a third (32%) expect to lose grandfathered status for all plans (or their only plan, if just one is offered), while 15% expect to lose it for at least one plan, but not all. Of the survey respondents that expect to have a grandfathered plan in 2011; about half believe they will have to forgo grandfathered status before 2014.
“The rules for maintaining grandfathered status were tougher than many employers expected,” said Ms. Watts. “As they start to get a clearer picture of projected cost for 2011, many are finding they need more flexibility to get their cost increases down to a level they can handle.”
For nearly two-thirds of the respondents that expect to lose grandfathered status, it comes down to the numbers: 63% said that the cost avoidance from the plan design and contribution changes they make will be greater than the additional costs resulting from the loss of grandfathered status. For example, while grandfathered plans are exempt from rules limiting cost-sharing for emergency services and mandating that certain preventive services be covered without cost-sharing, many employers already meet these standards and others don’t expect that compliance will add significantly to cost.
About a fourth say that complying with the rules for non-grandfathered plans will not be onerous (26%); 11% say they simply want to comply with the ultimate reform rules as soon as possible (Figure 5).
To maintain grandfathered status, an employer can only make fairly minimal changes to the employee cost-sharing provisions in their plans. They can’t raise deductibles or out-of-pocket (OOP) limits by more than 15 percentage points beyond the increase in the medical inflation, nor can they raise copays by more than that amount, or $5, if that is more. And they can’t increase employee coinsurance percentages at all. In addition, a health plan or benefit package will lose grandfathered status if the sponsor cuts their contribution rate toward total coverage costs by more than 5 percentage points.
But in their need to manage cost in 2011, many employers are not willing to stay within these limits. When asked what changes they would consider making that would result in the loss of grandfathered status, 35% said “increase deductibles or OOP maximums by more than the allowed amount;” 31% said “increase employee coinsurance levels” and 23% said “raise copays by more than the allowed amount.” About a fifth (21%) will consider seeking a new health plan insurer; this increases to 34% among the survey respondents with fewer than 500 employees (Figure 6).
“Putting a plan out to bid is a common cost-savings tactic for small employers,” said Ms. Watts. “Large employers are more likely to address cost increases by making plan design changes such as raising deductibles, which are still relatively low compared to those in small-employer plans.”
While the grandfathering rules allow for an increase in deductible, Ms. Watts pointed out that, for many employers, staying within the limit set won’t result in significant cost savings. For example, the median in-network PPO deductible for a large employer was $400 last year. To retain grandfathered status, an employer could raise this to $450, but not to $500. “But that change would reduce the cost of a typical health plan by less than 1%,” she said.
More than two-fifths of the largest survey respondents (those with 5,000 or more employees) expect to lose grandfathered status by raising the deductible or out-of-pocket maximum by more than the allowed amount.
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 www.mercer.com.