Business Costs

Health Law Likely to Add to
Employer Costs

Mandates kick in before any savings, but there are some things firms can do in the short term.

By Martha Lynn Craver, Associate Editor, The Kiplinger Letter

June 7, 2010

Employer health care costs in 2011 are likely to increase 7%-8%. As much as 20% of that is due to the health care law enacted by Congress in March. It imposes new requirements on many firms right away, while hoped-for savings will take years to materialize, if at all.

Covering kids until age 26 is a big driver, but the elimination of lifetime benefit caps and more bookkeeping hassles will also lead to higher costs. Some of the increase will be passed on by bumping up deductibles, out-of-pocket maximums and copays. For example, a $350 deductible may climb to $400 or doctor visit copays may increase from $15 to $20. To deal with coverage of workers’ older kids, more firms will charge a per capita premium so that a family of six pays more than a family of four. That gets around the new law’s ban on surcharges.

Employers should take care in redesigning plans. Too many changes will jeopardize protections extended to employers’ existing health care plans. (Existing plans are defined as those that were in place prior to March 23, 2010, when the bill was signed into law.) Regulators may classify greatly altered plans as “new,” subjecting them to additional regulations under the law -- requiring them to cover the full tab for any preventive health care services, for example.

Regulators promise to spell out soon what kinds of changes are OK. Waiting for clarification will let firms act without risking grandfathered status. “Plans are on hold pending release of the rules,” says Steve Wojcik of the National Business Group on Health.

Long term, look for even more changes as the tax on expensive plans takes effect. As more and more plans are caught by the 40% tax that begins in 2018, employers will make adjustments to avoid it, shifting more costs to workers or paring back on coverage, or both. Employers may start as early as 2012 to make changes to avoid the tax on so-called “Cadillac” plans. Many are likely to move workers to a consumer-directed health plan.

A recent study by Towers Watson found that more than 60% of large employer plans will be affected by 2018. “The original concept of the excise tax was to penalize employers with excessively rich health benefit plans,” says Randall Abbott, a senior consultant for Towers Watson. “Assuming even reasonable annual plan cost increases to project 2018 costs, many of today’s average plans will easily exceed the cost ceiling primarily directed at today’s ‘gold-plated’ plans.”

Note that insurance companies don’t have free rein to hike employer costs. The new law requires insurers to spend at least 80% of premiums paid by individuals and small groups on medical claims and improvements in quality. For large groups, the requirement is 85% of premiums. Insurers that don’t meet the standard will have to pay rebates to policyholders.

Any cost savings from the health care law are five years or more away. That’s when insurance exchanges and other measures start to take broad effect.

Meanwhile, many firms are considering these options as a way to save money now: •High quality centers. Employers want workers to use medical facilities with good records. Lowe’s, for one, partners with the Cleveland Clinic for cardiac care. The firm pays travel and lodging and waives copays and deductibles for heart patients. By focusing on quality, employers believe they can reduce the one-third of all medical care that is considered inappropriate or unnecessary. “If employers can reduce that one-third by sending patients to high quality providers, everybody wins,” says Tracy Watts, a consultant with Mercer.
•Setting up a “medical home” for each patient, especially the chronically ill. A physician’s office coordinates specialists, nursing homes and other providers and shares in any cost savings. This summer Boeing is expanding a pilot project that resulted in 20% savings due to fewer hospitalizations and emergency room visits.
•Tiered copays of nondrug treatments, based on cost effectiveness. Employers pay a bigger share of costs for acupuncture or an exercise regime, for example, as an alternative to back surgery.
•Clinics and telephone care. Firms too small for their own on-site clinic set up kiosks so workers can consult by phone or the Internet with staff doctors or other health providers. They’ll also promote the use of retail medical clinics, which typically are located in pharmacies and other stores.

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