- How many of the actual provisions of the ACA will be implemented and enforced still remains subject to change
- Employers remain engaged in finding better options through and around the evolving regulatory maze of Obamacare
- Private exchanges could provide a broader menu of coverage options and reduce administrative burdens
In the four years since passage of the Affordable Care Act (ACA), we have heard a wide range of speculative predictions about how private employers sponsoring health coverage would respond. More recent evidence from one of the oldest and largest annual surveys of employer plans, by human resources consulting firm Mercer, provides stronger indications that employer sponsors are neither heading for the exit doors nor sitting by passively as broader implementation of Obamacare unfolds.
Highlights from a Mercer briefing in Washington earlier this month include:
• Last year’s slow growth of total employee health benefits costs (a 16-year low) will speed up in 2014, even after employers make a number of plan changes to reduce costs
• Overall private employer coverage levels will remain essentially unchanged by the ACA in the near term.
• ACA-driven reductions in employee working hours are real, but more prevalent among smaller employers and particular industry sectors
• Private employers consistently see the 2018 “Cadillac” tax on high-cost benefits plans as their #1 complaint and are taking a number of early steps to avoid ever paying it.
• Moving to consumer-directed health plans, and not just greater employee cost-sharing alone, is the most effective cost-reducing response
• Employers’ financial incentives for improved health behavior remain well below the maximum levels permitted under the ACA
• Interest in private exchanges is growing
Mercer’s annual National Survey of Employer-Sponsored Health Plans is 29 years old. Its comprehensive questionnaire on health benefits issues and strategies projects results to all U.S. employers with 10 or more employees. The latest survey finds that the annual rate of growth for employer plan costs slowed again in 2013, to 2.1 percent. That figure reflects benefit changes that reduced an expected underlying cost trend of 7.4 percent growth for that year. In reviewing the annual spread between expected trend (pre-benefit changes) and measured trend (post-changes) for employer plans since the ACA was enacted, employers have increasingly worked harder to whittle down premium increases (by 3.7 percent in 2011, 4.1 percent in 2012, and 5.3 percent in 2013), but they may be facing diminishing returns in the next rounds of cost cutting. Employers expect an underlying cost trend of 8.0 percent for 2014, but project that they will reduce it only by 2.8 percent, to a final measured cost trend of 5.2 percent.
Another recent Health Reform Opinion Study by the RAND Corporation surveyed individual Americans between September 2013 and March 2014. RAND estimated that 9.3 million more people had healthcare coverage after most of the first season of open enrollment and expanded coverage under the ACA was implemented. More surprisingly, it claimed that net enrollment in employer-sponsored insurance plans increased by 8.2 million during that period. However, Mercer’s Health Reform in 2014 survey of actual employers offering those plans found very different results—only a minimal increase in employer health plan enrollment in 2014. The average percentage of all employees enrolled in employer health plans barely increased, from 69.1 percent in 2013 to 69.3 percent in 2014 and to a projected 69.8 percent in 2015. The average percentage of employees eligible for such health coverage also posted minimal increases (from 84.9 percent in 2013 to 85.2 percent in 2014 and to a projected 85.3 percent in 2015).
The Mercer employer plan survey finds that only 6 percent of large employers (500 or more employees) say they are likely to drop their health plans within the next five years, whereas 34 percent of the smallest employers (10-49 employees) are likely to do so. It also notes that about one in ten large employers will reduce the number of their employees that work 30 hours or more per week, in response to the employer mandate to provide coverage to such “full-time” workers. Those reduced-hours effects will hit large employers harder in such industry groups as retail/wholesale, transportation/communication/utility, and government; because they are more likely to not offer coverage in a qualified plan already to all their employees working 30 or more hours per week.
Remarkably, what concerns employer health plan sponsors the most is another ACA provision that will not even be implemented until 2018. Starting that year, a 40-percent excise tax will be imposed on high-cost (“Cadillac”) employer-sponsored coverage. Mercer estimates that 29 percent of large employers and 21 percent of small employers will be subject to the Cadillac tax in 2018 if they make no changes to their current plans. Those estimates grow to 40 percent of large employers and 25 percent of small employers by 2022, assuming no further plan changes before then.
One ironic side effect: If any such tax is initially imposed on insurers, plan administrators, or employers, they will ultimately pass it through to a firm’s employees. Mercer estimates that the average salary of workers with employers that offer a high-cost plan subject to this much higher 40-percent excise tax will be $45,360 in 2018. Yet their marginal tax rate for ordinary federal income taxes under current law would be only 15 percent on most, if not all, of their taxable income (and 25 percent for the rest), depending on future rates of inflation.
Employers in the annual Mercer survey have consistently targeted this future tax as their #1 concern since the ACA was enacted. More than 60 percent of them in Mercer’s 2011 employer plan survey expected that their current plans would trigger the tax, unless they took action to avoid it. But only four percent of them planned to take no special steps to reduce their plan costs below the future tax threshold amounts. Moreover, the latest 2013 Mercer survey found that 31 percent of employers reported that avoiding the excise tax had already influenced their health plan decisions for 2014 (four years ahead of time).
Thus far, the most likely countermeasures taken by employer to avoid the Cadillac tax include implementing or expanding consumer-driven health plan (CDHP) options, increasing employee cost-sharing, and adding or improving wellness programs. In 2013, the share of employees covered by employers in CDHPs equaled the share in HMOs (18 percent each), and the CDHP share is expected to exceed the HMO market share this year. One big reason is that CDHPs with health savings accounts cost about 20 percent less than traditional Preferred Provider Option (PPO) plans, and average HMO plan premiums cost slightly more than PPO plan premiums.
Although wellness programs remain popular among many employer plan sponsors, their use of financial incentives remains fairly modest. The ACA expanded the permissible limits for rewards under a health-contingent employer wellness program from 20 percent to 30 percent of the cost of health coverage (and even higher—to as much as 50 percent—for programs designed to prevent or reduce tobacco use). Nevertheless, Mercer reports that only two percent of employers use the maximum reward/penalty for tobacco and/or wellness, and the average amount of most rewards/penalties is well below $200 a year.
Private exchanges (as distinct from the government-created “public” ones created under the ACA) could provide a broader menu of coverage options, as well as reduce administrative burdens, for employers sponsoring group insurance for their workers. However, they are in the early stages of adoption and implementation. The 2013 Mercer survey of employer plans reports that one-fourth of employers are considering switching to a private exchange within two years for either their active or retired employees, and 45 percent would consider a switch within 5 years. Early evidence suggests that private exchanges help widen the range of actuarial values offered by employer plan options, lower the number of over-insured employees, and thereby reduce per-employee health benefits costs. But even among early-adopter employers that offer private exchange coverage options, less than one-third of them have moved to fixed defined-contribution financing.
Even the best employer plan surveys, such as those conducted by Mercer, carry some degree of uncertainty about the future. Moreover, exactly how many of the actual provisions of the ACA will be implemented and enforced still remains subject to change. But what comes through clearly is that employers remain engaged in finding better options through and around the evolving regulatory maze of Obamacare.
Tom Miller is a resident fellow at the American Enterprise Institute and a contributor to Economics21.