U.S. Employers Expect Health Care Costs to Rise 4% in 2015

Companies plan to continue subsidizing and managing benefits while taking aggressive action to keep costs down

ARLINGTON, VA, August 20, 2014 — U.S. employers expect a 4% increase in 2015 health care costs for active employees after plan design changes, according to global professional services company Towers Watson (NYSE, NASDAQ: TW). If no adjustments are made, employers project a 5.2% growth rate, putting absolute cost per person for health care benefits at an all-time high. Despite this cost trend, most (83%) employers consider health benefits an important element of their employee value proposition, and plan to continue subsidizing and managing them for both full-time and part-time active employees, according to the 2014 Towers Watson Health Care Changes Ahead Survey. They are, however, continuing to rethink company subsidies for spouses and dependents.

Of particular concern on the cost front is the Patient Protection and Affordable Care Act’s excise tax,* which goes into effect in 2018. Nearly three-quarters (73%) of employers said they are somewhat or very concerned they will trigger the tax based on their current plans and cost trajectory. More than four in 10 (43%) said avoiding the tax is the top priority for their health care strategies in 2015. As a result of the excise tax and other provisions of the health care reform law, CEOs and CFOs are more actively engaged in strategy discussions.

“In the current economic climate, affordability and sustainability remain dominant influences on employers’ overall health care strategies,” said Randall Abbott, senior consultant at Towers Watson. “Expense management and worker productivity are equally critical to business results. While employers are committed to providing health care benefits for their active employees for the foreseeable future, persistent concerns about cost escalation, the excise tax and workforce health have led to comprehensive strategies focused on both year-over-year results and long-term viability for health care benefits and workforce health improvement.”

“The emphasis is on achieving or maintaining a high-performance health plan, continued Abbott. “And CFOs are now focused on a new gold standard: managing health cost increases to the Consumer Price Index. This requires acute attention to improving program performance.”

Combatting the High Cost of Health Care

In response to short- and long-term cost concerns, a growing percentage (81%) of employers plan moderate to significant changes to their health care plans over the next three years, up from 72% a year ago. One tactic employers will use to curb spending in 2015 is specialty pharmacy management. Companies project that pharmacy-only cost trend will be 5.3% after plan changes (6% before changes). Employers will also embrace telemedicine for virtual physician office visits to improve access and efficiency of care delivery. Another key tactic is new payment approaches that hold providers accountable for the cost of an episode of care and outcomes. 

Longer term, for 2016 and 2017, nearly half (48%) of employers are considering tying incentives to reaching a specified health outcome such as biometric targets, compared with just 10% that intend to adopt it in 2015; 37% are considering offering plans with a higher level of benefit based on the use of high-performance or narrow networks of medical providers, compared with just 7% in 2015. One-third (34%) of employers are considering telemedicine, compared with 15% in 2015, further accelerating technology as a way to improve engagement and medical care access, and manage costs.

Another cost-mitigation tactic being considered for 2016 and 2017 are changes in how employers subsidize health care for spouses and dependents. A third (33%) of employers are considering significantly reducing company subsidies for spouses and dependents; 10% have already implemented such reductions, and 9% intend to do so in 2015. In addition, 26% said they are considering spouse exclusions or surcharges if coverage is available elsewhere; 30% have that tactic in place now, and another 7% expect to add it in 2015.

Employers are also examining caps on health care coverage subsidies for active employees, using defined contribution approaches, with 30% of employers considering them for 2016 and 2017, 13% having them in place today and another 3% planning them for 2015.

Private Health Exchange Interest Is Growing

With regard to private health insurance exchanges for active workers, 28% of employers said they have extensively evaluated the viability of private exchanges. Nearly one in four (24%) said private exchanges could provide a viable alternative for their active full-time employees in 2016. The top three factors that would cause employers to consider a private exchange for full-time active employees are evidence they can deliver greater value than their current self-managed model (64%), adoption of private exchanges by other large companies in their industry (34%) and an inability to stay below the excise tax ceiling as 2018 approaches (26%).

Despite the challenge of managing the high cost of health benefits, nearly all employers (99.5%) said they have no plan to exit health benefits for active employees and direct them and their families to public exchanges, with or without a financial subsidy. Three out of four employers (77%) said they are not at all confident public exchanges will provide a viable alternative for their active full-time employees in 2015 or 2016.

“The most effective employers are continually evaluating new strategies for improving health plan performance,” Abbott noted. “Examples include a steady migration to account-based health plans (ABHPs), action-based incentives, adoption of value-based payment methods with health plan partners and plan designs that drive efficiencies. Other options are technology-based solutions such as telemedicine, fitness devices or trackers, and social media to encourage employees to take a more active role in both their personal health status and how they use health care goods and services.”

Other Notable Findings

Two-thirds of CEOs and CFOs are more directly involved in developing their company’s health benefit strategies.

The importance of data and metrics to evaluate health care benefit program performance is growing, with 60% of respondents planning to emphasize data as a gauge of performance.

Three out of four employers (76%) are exploring the use of personalized digital technologies, including mobile health applications and fitness wearables, as well as social media to encourage greater activity among their employees.

Full-replacement ABHPs (making ABHPs the only plan option) could be in place at 50% of companies by 2017: 17% offer only an ABHP today; 4% intend to do so for 2015, and another 28% are considering it for 2016 or 2017.

*According to the Patient Protection and Affordable Care Act, in 2018, the federal government will impose a non-deductible excise tax on the value of employer-sponsored health programs that exceed an aggregate value of $10,200 for individual coverage and $27,500 for family coverage.

The tax equals 40% of the value that exceeds these thresholds.

About The Survey

The 2014 Towers Watson Health Care Changes Ahead Survey offers insights into the focus and timing of U.S. employers’ plans and perspectives related to their health benefits, and their efforts to better manage costs and employee engagement as well as their planned responses to the business risks associated with the 2018 excise tax. The survey was completed during July 2014 by 379 employee benefit professionals from midsize to large companies across a variety of industries and reflects respondents’ 2014 – 2017 health care benefit decisions. The responding companies comprise a broad range of industries and business sizes, and collectively employ 8.7 million employees.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at towerswatson.com.

Press Contacts

For Towers Watson: Rob Wyse

+1 212 920 1470

rob@capital-content.com

Source: Towers Watson