As organizations cap or reduce their subsidies of retiree medical coverage, they should be compensating by providing health plan options that allow employees to set aside funds for future needs. But the uptake isn't there, and that suggests that employers are not connecting the dots by positioning tax-favored savings opportunities as a means to help fund post retirement medical expenses.
STAMFORD, Conn. (PRWEB) September 28, 2007
According to Towers Perrin's annual Health Care Cost Survey, which for nearly two decades has offered the industry's most in-depth, prospective look at the upcoming year's health care costs for employers, employees and retirees, the 7% growth rate projected for 2008 is among the lowest of the last five years. While the trend is holding steady for the broad respondent group, the survey shows a significant cost differential for companies that are actively -- and effectively -- managing program performance. Those "high-performing companies"(1) will see annual per-employee costs of about $1,500 less than low performers in 2008, a significant advantage in today's intensely competitive markets.
Nevertheless, the cumulative effect of rising costs continues to produce record-high numbers for employer-sponsored health plans and employee contributions, and the burden is felt most acutely by lower-wage workers and those who retire before becoming eligible for Medicare.
The 2008 Towers Perrin Health Care Cost Survey database includes detailed information on the health benefit programs provided by more than 300 of the nation's largest employers, covering nearly six million U.S. employees, retirees and dependents.
"The good news is that, for the first time in over a decade, we are seeing a number of companies keeping cost growth near the Consumer Price Index for medical services (medical CPI), which currently stands at about 4%," said Dave Guilmette, Managing Director of the Towers Perrin Health and Welfare practice. "Our insights on these high-performing companies provide a clear view of the best practices for maintaining adequate coverage while staying within cost targets. But there's far less clarity around--and focus on--affordability issues, particularly for retirees under age 65 and low-wage workers. If we don't take more steps to bridge the growing gap for these workers, the workforce and societal implications could be significant."
In flat dollar terms, next year's gross health care expenditure is expected to rise by an average of $577 per employee, to an average total cost of $9,312. Employers are expecting to subsidize 78% of next year's premium costs, and employees will have to cover the remaining 22%, plus usage-based copays, deductibles and coinsurance. While the employer-employee premium cost share remains the same as last year's split, the accelerated increase in the actual employee contribution combined with decreasing benefit values means that the 22% employee share actually buys less coverage than in past years. For example, the incremental out-of-pocket cost employees will assume in 2008 due to plan design changes is approximately $200.
Employee contributions, on average, will jump by $156 per employee per year to $2,040, an 8% increase that is roughly more than twice that of annual employee merit increases. The combined effect is that over the last five years, out-of-pocket costs for employees have essentially doubled, a clear indication of how pronounced the affordability issue remains, particularly for low-wage workers. (see Exhibit 1.)
Total Employee/Employer Health Care Costs: 2003 vs. 2008
See attached slide.
The data also indicate that organizations are taking a different view--and exhibiting different commitment levels--to programs for retirees, a trend that will have significant long-term workforce and social implications. In fact, less than half of the companies surveyed (47%) currently subsidize retiree medical coverage for current or future retirees. Of those that are continuing a subsidy, the share they are asking retirees to provide is rapidly increasing, particularly for retirees under age 65. For that cohort, a retiree-only contribution in 2008 will be $3,324; an employee/retiree plus spouse contribution will be $6,996 and a family contribution will be $9,192 annually. (see exhibit 4.)
For 2008, retirees under age 65 will pay an additional $492, which represents an 8% increase and means they are now contributing 50% of their overall health benefit cost. Retirees over 65 will contribute $120 more in 2008, a 5% increase that represents a total contribution rate of 44%.
"One of the most significant findings of our 2008 survey is that we are seeing a clear and dramatic divergence in how companies are defining their financial commitment for active employees versus retirees," added Ron Fontanetta, a principal in the firm's Health and Welfare practice. "While the data show that many companies have become quite proactive in terms of supporting active employees -- taking steps to help them manage health care program changes -- they are clearly doing less to help employees prepare for medical expenses in retirement. The long-term effect could be a negative one and encourage older workers who want to leave the workforce to stay in their jobs primarily to receive company-subsidized health care."
2008 Average Active Employee and Retiree Medical Costs: A Detailed Look
Analyzing the data by coverage level, the average reported 2008 cost of medical coverage for active-employee-only coverage is $4,704 per year ($392 monthly), $9,660 per year for employee-plus-one-dependent coverage ($805 monthly) and $13,704 per year ($1,142 monthly) for family coverage.
The total cost for retirees under age 65 is the highest in the Towers Perrin survey--$569 per month for retiree-only coverage ($6,828 annually), and more for coverage that includes dependents. (see Exhibit 2).
Average 2008 Monthly Health Care Costs and Cost Increases by Covered Group*
See attached slide.
Employers continue to shoulder most of the burden. Of the total 2008 premium increase of $577, employers will experience an annual increase of $421 per employee, while employees, on average, will pay $156 more.
In addition to premiums, active employees and their dependents can expect a copay of about $20 for regular doctor office visits and a $30 copay for specialist visits. Under plans with coinsurance, employees will pay about 35% of the cost of an office visit. Active employees and their dependents will pay, on average, $10 for generic prescriptions and $25 for brand-name prescriptions in 2008.
Companies Proving That Active Management Matters
Among positive news for employers and employees, the survey shows that, for 2008, a number of companies have succeeded in keeping a tight rein on the cost of their own programs and, as such, are helping to keep the overall rate of increase dramatically lower than the double-digit jumps experienced four to eight years ago. Many companies, however, remain unclear on how to balance health care cost pressures with workforce goals and continue to experience cost increases more characteristic of the late 1990s. The result is wide variation in employer and employee cost burdens among similarly sized companies. For example, the 2008 data show that nearly a quarter of companies (22%) are still experiencing increases of 11% or more.
To better understand the factors that contribute to cost variation, for the past three years, Towers Perrin has divided respondents in its annual health care cost database into three categories -- low-performing, average-performing and high-performing companies. Performance designations are based on relative costs and cost increases, as well as whether an organization is meeting its health benefit objectives in such areas as efficient purchasing, employee engagement and managing health risks in the employee population.
The Art of the Possible
While nearly a quarter of the survey respondents continue to struggle with double-digit cost increases, nearly half of the high performers are managing to get their increases much closer to the medical CPI of about 4%. Among high performers, 45% have cost increases of 5% or less --evidence, in Towers Perrin's view, that active management of program performance is an exercise in the "art of the possible," and an increasingly urgent mandate for companies still experiencing double-digit growth rates. The cost spreads between high-performing companies and low performers can be significant and can have a tremendous impact on an organization's profits and positioning in the marketplace. And if left unchecked over a number of years, the competitive differential can become a significant business threat to the organization. (see Exhibit 3.)
Cost Variation Across Companies: High-Performing Companies vs. Low-Performing Companies
See attached slide.
High-performing companies aren't simply shifting costs to their employees to keep their costs low, but rather are employing a broad range of tactics and strategies to hold the line on costs for both the company and employees. In fact, employees at high-performing companies will pay significantly less than employees at low-performing companies -- approximately $1,836 (per year) on average versus the $2,256 employees at low-performing companies will pay in 2008. Moreover, employees at high-performing companies get more for their money in the form of health care information, decision support tools and other valuable resources.
Broadly speaking, the difference between high- and low-performing companies can be summarized by high performers' commitment to "active management" of their health plans and delivery processes. According to the Towers Perrin data, these companies have clear strategies in place to drive improvements in employees' overall health and wellness, engagement in health care decisions and health-related behaviors, as well as to identify problems early and take advantage of opportunities for improvement by understanding the current state of their benefit program and the health care system overall.
More specifically, high performers show a deep commitment to managing their programs in ways that benefit both the company and employees, and have:
-- A clear focus on and commitment to supporting employees' health and health care decisions
-- Well-articulated strategies and rigorous metrics for evaluating program effectiveness
-- Critical program performance factors in place
-- Benefit designs that encourage transparency and accountability
-- Rigorous -- and effective -- communication and decision support programs that successfully engage employees and help build a culture of health in the organization.
Following are highlights.
-- Commitment to employees -- High-performing companies are highly committed to employees -- supporting employees' ability to make sound health care decisions, taking steps to motivate employees to manage their health care purchases responsibly, and working to manage health risks and conditions in the employee population overall.
-- Managing by measuring -- High performers are far more rigorous than low performers in developing and documenting their health care strategies. They also manage by fact. For example, the vast majority of high-performing companies conduct extensive measurement of program costs versus less than half of the low-performing group.
-- Ensuring critical success factors are in place -- While the 2008 data show that all companies are doing more than ever to ensure that critical success factors -- such as senior leadership involvement, support from managers and supervisors, and disciplined execution processes -- are in place, high-performing companies are much more committed to these program pillars.
-- Increasing accountability -- High-performing companies design their programs to make the true costs of care visible to employees, and hold them accountable for the decisions they make at the point of care using, for example, coinsurance rather than copays to share costs with employees.
-- Engaging employees -- High-performing companies require employees to be more accountable for their decisions, and take steps to help employees do that by expanding communication initiatives and providing a variety of tools and resources to support employee awareness, understanding and action.
-- Building a culture of health -- High performers are much more likely to say they're committed to building a culture of health in their organizations and to report that their employee education efforts are succeeding. For example, a strong majority of the high performers say employees accept their roles and responsibilities under their health plan, are comfortable with the level of risk under the plan, and understand and use decision support tools.
"As we learn more about what high-performing companies are doing differently, it is becoming increasingly apparent that accountability is one of the most critical success factors," said Guilmette. "But what the high performers show us is that accountability swings both ways. As companies ask their employees to become more accountable for their health care consumption and participate in cost-control initiatives, the companies themselves must become more accountable to employees by providing the resources, support tools, education and communication initiatives that employees need to be successful consumers of health care. High-performing companies are far more committed to implementing these measures than the low-performing group, and we believe that is the reason they are so much more successful."
One noteworthy surprise has been the slow growth in the prevalence of and enrollment in account-based health plans (also know as "high deductible" and "consumer driven" health plans) from last year's levels. This trend, more than any other, indicates that employers are not availing themselves of all the market has to offer to offset affordability concerns. When properly implemented, account-based health plans give employers significant opportunities to encourage desired employee behaviors and control costs, while giving employees opportunities to better manage their expenses, reduce their total out-of-pocket costs and in many cases take advantage of tax-favored savings opportunities.
The slow growth of these plans is particularly troubling given the increasingly passive role employers seem to be taking when it comes to subsidizing and/or supporting employees' needs to prepare for health care expenses in retirement. As evidence, only 29% of the survey respondents see helping employees prepare for financial protection in retirement as a primary or large role for the company, and most do not see this role expanding over the next five years.
While many companies are re-characterizing or redefining the level of financial subsidy for active and retiree programs, they are compensating by stepping up the support they provide to employees during active employment. However, when it comes to retiree programs, they are not only reducing the financial subsidy, but also, it appears, neglecting support measures that would help employees adequately prepare for retirement.
"The relative absence of growth in account-based health plan implementations reveals an important gap in organizations' retirement planning," said Fontanetta. "As organizations cap or reduce their subsidies of retiree medical coverage, they should be compensating by providing health plan options that allow employees to set aside funds for future needs. But the uptake isn't there, and that suggests that employers are not connecting the dots by positioning tax-favored savings opportunities as a means to help fund post retirement medical expenses."
The Accelerating Threat to Affordability
While the slowing of trend is certainly positive news for all, the financial burden of health care continues to grow and is becoming dangerously difficult for certain populations to bear, especially low-wage workers and pre-65 retirees (see Exhibit 4).
Average Employee/Retiree Share of 2008 Coverage Costs
See attached slide.
In flat dollar terms, the employee share in 2008 will average $75 a month ($900 annually) for employee-only coverage and $261 a month ($3,132 annually) for family coverage. Retirees, meanwhile, will contribute 49% of the total cost of their coverage, with retirees age 65 and over paying an average of $125 a month ($1,500 annually) for retiree-only coverage. Retirees under 65 will be hardest hit by cost increases in 2008 and will pay an average of $277 a month ($3,324 annually) for retiree-only coverage.
"Increasing employee contributions, deductibles, copays and premiums are causing many workers to opt out of their employers' health plans, forcing significant numbers of employees to join the ranks of the working uninsured," said Guilmette. "Towers Perrin has observed that approximately 20% of employees in the service sector opt out of their employer's health plan. Industries with lower profit margins or significant cost pressures often provide less employer subsidization, which can result in lower participation rates. Not only does this create significant social implications for large portions of the population today but, as our country continues to shift toward a service economy, this phenomenon will impact even greater numbers of Americans."
Reform on the Horizon?
For the first time in its 19-year history, the survey asked respondents questions about the structure of the current U.S. health care system and, more specifically, to provide their organizations' point of view as employers on issues such as the likelihood of health care reform.
Given the long-standing nature of affordability issues, it's perhaps no surprise that the only area where respondents seem to have a clear consensus is the need for reform in the insurance and health care delivery arenas. Sixty-five percent agree that there should be legislation to address insurance reform and, notably, 65% agree that health care delivery should be reformed.
As far as expectations for the possibility and timing of such reforms, respondents see the states as the drivers of change rather than the federal government and believe that the first wave will happen within the next four years.
"Our data suggest that the majority of organizations believe reform will happen, and that suggests that we are rapidly approaching a tipping point," noted Guilmette. "Organizations seem to be saying that, while they want reforms to improve health care delivery and performance, they continue to support an employer-based delivery system."
About the Survey
The Towers Perrin 2008 Health Care Cost Survey was conducted during August and September 2007. Participants were asked to report their 2007 and 2008 per-capita premium costs for insured health and dental plans, and premium equivalents (i.e., estimated benefit and administrative costs) for self-insured plans. Survey respondents represent primarily Fortune 1000 companies with operations in numerous locations nationwide. Health benefits for the 315 participating companies total nearly $30 billion annually.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. Through its HR Services business, Towers Perrin provides global human resource consulting and administration services that help organizations effectively manage their investment in people. Areas of focus include employee benefits, compensation, communication, change management, employee research and the delivery of HR services. The firm's other businesses are Reinsurance, which provides reinsurance intermediary services, and Tillinghast, which provides management and actuarial consulting to the financial services industry. Together these businesses have offices and business partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information about Towers Perrin is available at http://www.towersperrin.com/hrservices.
EDITOR'S NOTE: David Guilmette, Ron Fontanetta, Mark Olson and other Towers Perrin consultants are available for interviews on this topic. Please contact Joe Conway (914-745-4175) or Jason Schlossberg (646-747-7140) to arrange for an interview.
(1) Towers Perrin divided respondents in its annual health care cost database into three categories -- low-performing, average-performing and high-performing companies. Performance designations are based on relative costs and cost increases, as well as whether an organization is meeting its health benefit objectives in certain key areas.