Commercial Health Insurance

Has the cost of employer-sponsored health insurance reached a critical point?
by Richard Hamer and Adam Johnson

  

Background

According to the Kaiser Family Foundation, the 2018 cost of employer-sponsored health insurance for a family reached nearly $20,000 per year, with employees, on average, paying roughly $6,000 themselves.  Since 2006, the study reports, employer health premium inflation has been two times higher than wage inflation.  (Kaiser Family Foundation, Employer Health Benefits, 2018 Summary of Findings)

What’s behind the escalating cost?  The Health Care Cost Institute (HCCI) reports that, from 2014 through 2018, the inflation of employer health plan spending was primarily due to price increases for inpatient, outpatient, professional services, and drugs.  Increased utilization or improved quality of care were relatively minor contributors to inflation.  The HCCI analysis concluded that price increases account for three-quarters of the inflation in payments by employer-based insurance.  (Health Care Cost Institute, 2018 Health Care Cost and Utilization Report, February 2020)

The Upshot:

  • Over the past two decades employer-sponsored health insurance premiums have continued to go up, deductibles have gotten higher, costs have continued to escalate.
  • Price increases for health care services are the primary explanation for inflation of employer-sponsored health plan expenditures -- higher utilization and improvements in quality are secondary explanations.
  • The history of employer health insurance premium and cost inflation indicates that insurers and employers have generally been unable to successfully challenge health services price inflation.
  • Even before the COVID-19 crisis, the question was being raised as to whether the status quo would be stable or the appetite was strong enough to trigger substantial change.

What Will Change?

One scenario is that as the economy recovers, employer health benefits will resume their former trajectory -- premiums will increase and costs will be shifted, employers will continue to consider health coverage an essential benefit, and few cost control alternatives will be presented to them.

An alternative scenario is that as the fall enrollment season approaches, a significant population will have lost employer-sponsored insurance.  These people will have migrated to ACA markets, Medicaid or will have become uninsured.  For most, because of its high cost, COBRA will not be an attractive option.

In the alternative scenario, remaining employers and employees will be operating at lower output and revenue levels.  Firms’ ability to absorb high premium increases will be tested.  While firms will not want to degrade the level of benefits they have promised their employees, the circumstances may create greater consensus that new solutions are needed.

Deft Research surveyed employers and employees in April to understand more about their perceptions of employer-sponsored health benefits.  The report for Deft Research’s employer/employee study will published at the end of May.  The study used an online survey to obtain responses from over 800 employers and 3,000 employees.

A survey of consumers and employer Group Benefit Administrators is helpful to business planners to develop scenarios depicting what may happen in the future if certain things fall into place.  Below is an overview of findings and implications for those building scenarios of future possibilities.

What do Employers and Employees Think?

1.     Many employers are re-considering whether they will offer health benefits in 2021 at all.
Absolute elimination of health benefits is unlikely, but this shows the demand for alternatives is high.  As alternatives are found, three collateral impacts are worth watching for: 1) the ACA market may expand if employers offer health benefits to fewer employees, 2) more employees may decline coverage if they are exposed to more out of pocket costs, again triggering an expansion of ACA markets and/or an appetite for catastrophic or non-qualified insurance, and 3) if more care moves through digital and retail channels, coverage through network providers may become less important to consumers.

2.     Some employers are getting out of the group benefit business by making a contribution to Individual Coverage Health Reimbursement Arrangements (ICHRA’s).
If  ICHRA’s become common, the existing distribution of ACA plans provides a guide.  In the ACA market, 90% have chosen Silver or Bronze plans which have lower premiums and higher cost sharing. But many consumers do not feel their ACA plans are good values either, so there will be continuing pressure to address the cost of care.  If consumers become  increasingly individualized, they are likely to also develop more sensitivity to the value they receive.  If individualized sensitivities prevail, then cost-transparency would become a competitive advantage.

3.     In the past year, employers have increased the availability of telemedicine and significant numbers of employees are using it.
Telemedicine presents an appealing combination of cost control and convenience.  Obstacles to telemedicine – reimbursement, regulation, consumer and provider acceptance – are wilting, for now.  If the obstacles remain low, the key question for telemedicine is how services will become distributed between telemedicine and traditional care settings.  Many employees indicate that, for now at least, they continue to prefer office visits for their care.

4.     Employers are considering smaller provider networks, smaller number of plans offered, reductions in extra benefits, and elimination of wellness programs.
These are old-school approaches that have been discussed by employers for many years.  A substantial number of employers have discarded them, but just as many keep them in the tool box.  Important obstacles are that  workers dislike reductions and restrictions in benefits and, creating friction between employer and employee is the opposite of what health benefits are supposed to do.  So this class of remedies has been a commonly discussed, less commonly executed solution.  If other means to control costs appear, these will not be used.  If solid alternatives do not emerge, then, if the past is any indicator, wellness and extra benefits will go first.

5.     They are also considering shifting more costs to employees.
In the past twenty years, this has been the most common strategy employers have used to control their own costs.  So this is a scenario that we are currently living in and a scenario that may be ending.  If cost shifting were to become a less viable approach, it would have to be accompanied by a more dramatic alteration of benefits.  The pressure created by employer-to-employee cost shifting is what leads people to consider Medicare-for-All, and, at the other end of the spectrum, catastrophic-only coverage as possibilities.

6.     Some employers are seeking multi-year contracts with health plans to make costs predictable.
Multi-year contracts could flatten out premium increases over their term.  An extended benefit might accrue to health systems.  If partnerships between health systems and health plans support multi-year employer contracting they might also lead to more precise forecasting in volume of patients per service for care providers.

These insights are delivered through research specifically designed to reduce uncertainty for decision makers.  Information that was once unavailable, is now here to help take bolder and more effective steps toward growth and adaptation.

LEARN MORE ABOUT DEFT RESEARCH’S EMPLOYER/EMPLOYEE STUDY

 

 

 

 

 

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