By Shandon Fowler
Health care costs for employers are projected to rise 6.5 percent in 2016, according to PricewaterhouseCoopers’ Health Research Institute (HRI). Although this does represent an increase, that increase is slightly less than what was projected for employer health care costs for 2015. We can attribute this decline in growth to a number of factors, including:
- CDHP adoption. Compared to other plan types (health maintenance organization, preferred provider organization, point of service plan), adoption of consumer-directed health plans (CDHPs) – also known as high deductible health plans - has been profound. CDHPs have shown strong double-digit growth in the past five years alone. Almost one in two employers now offers at least one CDHP and one in five Americans has an HDHP, according to Mercer's 2014 National Survey of Employer-Sponsored Health Plans 2014. But what makes CDHP adoption a generator of cost savings?
- Premium – Premium costs for CDHPs are, on average, lower than HMOs and PPOs, according to a Kaiser Family Foundation report. That alone is probably the single-biggest factor of the flattening phenomenon we’re seeing in health costs.
- Habit change – It also has been widely stated that consumers who elect CDHPs change their health consumption behavior. Since they are paying full “first-dollar” for doctor visits, people are thinking twice about going to the doctor for what they consider minor ailments.
- More savings options – Combining a CDHP with a health savings account (HSA) can help consumers close the deductible gap in the event of moderate and major medical events. However, some consumers may not fully understand the importance of funding these types of accounts. The result is that many new CDHP customers — especially those considered financially at risk — may be unable to cover the expenses incurred with moderate to major medical events.
2. The Affordable Care Act. While some argue that the ACA has perpetuated an increase in costs, the impact in many cases has been the opposite or actually the reverse.
- Minimum essential benefits – By requiring basic coverage levels such as wellness visits and physicals, insurers have argued that plan premium costs have had to go up. However, those rising costs may be offset at the consumer level by the increased coverage. Consumers might pay a slightly higher premium (which is probably covered partially or fully by their employer) but they’re getting a free physical examination and other preventive services at a reduced cost. In this case, costs aren’t really declining; they’re just having less of an impact on consumers.
- Medical loss ratio – With insurance carriers required to spend 85 percent of all plan premiums on medical provider services, they needed to squeeze more efficiency out of their plans. This could contribute to flattening year-over-year changes by bringing the hard-to-control costs of administration and marketing into check.
Higher coverage rates – Between individual subsidies for commercial coverage and expanded Medicaid in half of the states, the ACA has added nearly 20 million Americans to the ranks of the insured. It’s still a bit early to know for sure whether the impact on health care expenses will stick. However, it has long been argued that the “hidden cost” of the uninsured means that everyone with insurance pays for everyone without insurance through higher premiums and provider costs, especially hospital costs. With more Americans having coverage, more people may be seeing doctors before their health issues become severe and costly to treat. More insured people means flatter prices for all.
- Competition and transparency – “When health plans compete, you win” was a common refrain of the public exchanges as they were being pitched to the American public. Analysts have seen smaller cost increases in states with more carrier competition for the individual market covered by the public exchanges than they have seen in states where there is less competition. That’s according to a Kaiser Family Foundation study of 2016 insurer rate filings to state regulators.
- The Cadillac Tax – Many attribute the Cadillac Tax (if it remains in place) as the driver of both decreasing costs and of dispute in the benefits industry. According to a recent Kaiser Family Foundation report, up to 26 percent of companies are expected to reach the thresholds for the Cadillac Tax by 2018. But here’s the thing: Those thresholds are really, really high. The family limit exceeds $10,000, which means that a family of four at the poverty level is paying more for only the premium of their health insurance than they are paying for any other expense except, maybe, housing.
There are two reasons why it doesn’t matter so much that the family is paying only a percentage of that amount while their employer is paying the rest. The first reason is because employer contributions as a share of total premium have been declining for at least 15 years now. The second reason is that the full amount figures into an employee’s total compensation. The more the employer is paying in insurance premiums, the less they can and will give that employee in salary and other compensation such as paid leave. So yes, the Cadillac Tax is having an impact on costs, in some cases by accelerating the adoption of CDHPs. But that train had already left the station, and the Cadillac Tax simply is speeding it up.
3. Consumerism. The ACA has done a passable job in its attempt to reduce costs. It also has accelerated a broader shift to consumerism in the health care business.
- Private exchanges – Also known as private marketplaces, this idea of bringing more competition and consumer choice to the benefits business has done well in the situations where data are available. Private exchanges have shown that customers with more options for health plans “buy down” from the options their employer made available in the past. Many of them are buying CDHPs, which sets in motion everything noted above.
- Competition and transparency – At the micro level (inside private exchanges), health insurance carriers are being forced to compete side-by-side with more cost transparency than ever before. This level playing field is making insurance carriers think twice about increasing their premium by too much year-over-year. In addition, technology is getting smarter and data has become more widely available. These factors enable consumers to shop around for cheaper provider services. This phenomenon is still relatively small, but the more data becomes available, the greater the cost impacts will be. In other words, the cost curve could bend in consumers’ favor for some time to come, at least on the provider side.
4. Economic factors. Perception and reality sometimes merge. The current economic climate may be contributing to attitudes on health costs as well.
- Employment – Unemployment sits at about 5 percent, the lowest rate since the George W. Bush presidency. When unemployment is low, competition for talent is high. When competition for talent is high, benefits such as health insurance are an extremely important component of finding and keeping talented employees. In 2010, employers could blame the economy for raising costs significantly on their covered employees. Now they can blame the economy for having to keep the costs low in order to compete for talent.
- Consumer confidence – Families are feeling less of a financial pinch now than they have in nearly a decade. That, combined with a flattening cost curve for health care, may make them feel much more confident about being able to cover their health care costs.
5. Access to data. Information is now more readily available than ever before, thanks to technology. Companies and consumers alike are realizing how valuable it is to have that information organized and put to good use.
- Smarter plan design – As mentioned above, companies are competing for top talent, which means they have to balance comprehensive and competitive benefits packages with controlling costs. However, a comprehensive benefits package should be more about meeting current and prospective employee needs rather than offering everything under the sun. Data analytics tools provide employers with the necessary insights to design a benefits package that is tailored to their workforce and appealing to prospective employees.
- Personalized decision support – With the limited understanding of health plans, it’s doubtful that consumers have tracked their health care utilization, much less created their own health profiles. Fortunately, technology now can do that for them. With integrated personal claims data and national benchmarks, combined with behavioral science and decision support tools that build personal risk assessments, technology can guide consumers to choose benefits that are cost effective for their specific situations.
Although these factors contribute to flattening the cost curve, they are not a guarantee that we’ll continue to see a decline in rising health care costs. In fact, when taking cost control tactics into account, Health Research Inc. estimates you could slow cost growth to just 4.5 percent. The key is having a system in place that is flexible enough to turn these factors, as well as any forthcoming industry dynamics, into a positive cost-savings opportunity.
Shandon Fowler is the director of product strategy for marketplaces at Benefitfocus. Shandon may be contacted at [email protected].