The Elephant in the Room

If you were asked to describe the effects of the Affordable Care Act on employer-sponsored health care benefits, you might refer to former Secretary of Defense Donald Rumsfeld’s well-warn dictionary and start listing the law’s “known knowns” and “known unknowns.

We know, for example, that 8 million Americans have signed up for coverage under the ACA. We also know that many more remain uninsured (depending on who’s counting, figures range from 20 million to 30 million). But we don’t yet know—and may not for a while—whether enough healthy young people will enroll to prevent adverse selection and ever-higher health insurance rates.

Among agents and brokers, it’s the unknowns that are causing some confusion. David Ziegler, executive vice president for the Eastern region in Arthur J. Gallagher’s benefits practice, has heard the Obama administration tout the number 8 million for the newly enrolled. “The numbers aren’t clear, but I’m aware that a large part of the enrollment has gone to Medicaid,” Ziegler says. “I also read that up to 6 million people that previously had private insurance have had their coverage cancelled. At this point, I’m not comfortable that I know how many people have gone into the exchanges or that anyone else has accurate numbers. I’m unaware of what the risk profile of those who have enrolled looks like. That’s a lot of questions.”

We know the vast majority of employers are not exiting benefits. And we also know costs are still going up.

So what can employers do now? Where do things stand today for the benefits market in general? Will private exchanges overtake the state and federal one? And what’s the future of smaller agents and brokers when it comes to benefits?

What We Do Know

It’s an opportunity for benefit brokers and consultants, says John Kirke, president of Employee Benefits and Health Risk Management at IMA Financial Group.

“Across our entire book, we have not seen either the sentiment or market movement among employers” to indicate they’re out of the business of offering healthcare benefits, Kirke says. “What they are saying is, ‘Everything is on the table.’ Clients want to see creative options. Showing them choices of the Blues, UnitedHealthcare, Cigna, etc. isn’t enough.”

Aon Hewitt’s “2014 Healthcare Survey” found 95% of employers intend to keep providing group health benefits to active employees during the next three to five years.

But changes are afoot for employer plans. Two in five employers will require workers to take a more active role in their health, and one in five expects to continue traditional ways of containing healthcare expenses, such as increased cost-sharing with employees.

At the same time, the total 2014 increase in health benefit spending per employee is expected to be 5.2%. In 2013 it was 2.1%, according to Mercer’s National Survey of Employer-Sponsored Health Plans.

Towers Watson and the National Business Group on Health reached similar findings: They expect 2014 per-employee healthcare costs to rise 4.4%, to $9,560, and employees will be expected to shoulder even more of the cost.

“Folks are so jaded that a slow rate of growth in costs is considered victory,” says Ken Ambos, senior vice president of employee benefits in the New York office of William Gallagher Associates. WGA is seeing healthcare rate increases from 7% to 11% across its middle-market client base, he says.

“Increases include ACA surcharges that carriers are passing along, and the rates are not accounting for any plan changes that an employer might have made to address cost escalations. If you took out the ACA effects, rates actually are about a point or two less than last year. But it’s too early to give a crystal-ball view this year.”

The Kaiser Family Foundation reports healthcare premiums for family coverage have risen more than 80% since 2003. More employers are considering self-insuring, even if they hadn’t before, and many are looking at how to shift more benefit costs onto their employees.

ACA Impact: The Unknown

As Affordable Care Act provisions take effect, despite further delays in the mandate to offer coverage, the overall impact on employers—and, by extension, agents and brokers—remains unknown.

Over the past year, a significant percentage of mergers and acquisitions involved brokerages with benefit books. The need for scale to handle the growing complexity in benefits was a driver for many of these deals, says Timothy Cunningham, a principal with Optis Partners in Chicago.

“A lot of inertia among agents and brokers is because of uncertainty,” Cunningham says. “Smaller firms may suffer under Obamacare, not so much because business will go to alternate delivery mechanisms but because they don’t have the tools and scale to respond to clients’ needs. You can get conflicting reports on the impact of Obamacare, but no one knows at this point. It’s unknown how much slippage will occur among small-group plans. The jury is still out.”

Jim Campbell, a partner and senior vice president at Reagan Consulting in Atlanta, agrees. “There’s no question that among small benefit agencies there’s some angst and not necessarily a clear direction for how they will move forward. There are more questions than answers at this point. How the healthcare reform law will shake out just isn’t known right now.”

Employers, brokers and carriers are on the same side of another unknown: the pricing of health plans. Scott Sinder, CIAB general counsel, says employers won’t see a coverage mandate this year, and smaller employers—those with 50 to 99 lives in their plans—won’t see a mandate until 2016.

“A composite rating existed pre-ACA, in which insurers looked at plan participation rates in setting premiums. Now, underwriters can’t do that under ACA; they have to set premiums by age band. But employers don’t know who’s going to participate, so predictability is what’s changed,” Sinder explains.

“Costs have always been rising, and employers are passing more of the cost on to employees,” he says. The administration has yet to release non-discrimination rules under the ACA, which “could be very disruptive depending on how they’re interpreted.”

Age banding is creating a lot of uncertainty for health insurers, agrees IMA’s Kirke. “Underwriters are spooked,” Kirke says. “They don’t know how to price for a certain kind of unknown risk because they don’t yet know the mix of people coming in.”

What bears watching is enrollment in the public exchanges, says WGA’s Ambos. In theory, Ambos says, the uninsured cost that providers pass along may help stabilize prices. “That could slow growth in insurance rates,” he says. “But the demographics of enrollees matter. If just a higher number of people with a disproportionately high-risk profile enroll, this house of cards could come crashing down.”

In a recent interview with Modern Healthcare magazine, Joe Swedish, chief executive officer of WellPoint, says ACA enrollment “basically has turned out as we expected.” Given the changes, he expects an “uptick” in premium costs in 2015. “We just don’t know how high,” he says.

With healthcare costs continuing to rise, employers are looking to flatten the rate of increase. One major driver of healthcare costs that must be addressed, Kirke says, is the specialty drug pipeline. Even with prescription benefit management firms providing discounts, some drugs can cost hundreds of thousands of dollars annually. He cites a new hepatitis C drug that has quickly become one of the highest-grossing pharmaceuticals, partly due to its efficacy and cost.

“Who’s paying for that? There is still a lot of pressure on the commercial payer,” Kirke says.

“For employers interested in managing costs and big enough to demand data from their claims administrators,” Ziegler says, “warehousing and data management are probably the key building blocks. You cannot manage what you cannot measure. Pharmacy benefit cost is another area where we are spending a lot of time working with our clients. PPACA has clearly increased cost pressures in the short term, and employers are now asking, ‘Where is the offset?’”

Future of Exchanges

Even as federal and state healthcare exchanges have signed up millions of enrollees, private healthcare exchanges are emerging as an attractive option for employers who want to keep offering group plans. Since 2013, there has been a sharp rise in participation among larger employers in the private exchanges but less so among smaller and middle-market employers. Among the larger exchanges, enrollment doubled from 2013 to 2014.

“The middle market isn’t there yet, in terms of embracing private exchanges,” Ambos says. “It’s at the stage that consumer-directed health plans were five or six years ago—a lot of discussion and a lot of interest.”

WGA isn’t seeing significant uptake among its middle-market clients for private exchanges. “But we’re spending a ton of time talking with clients about them,” he says.

It remains to be seen how effectively private exchanges can control costs.

“While private exchanges don’t inherently require a defined contribution strategy, most vehicles thus far tend to feature that approach as a core design element in their pitch to employers,” Ambos says. “As happens in this business, what’s old is new again—defined contribution has been around for many years if you look back to the days of flex or cafeteria plans. Today’s exchanges try to leverage the concept via more user-friendly technology interfaces.”

In a typical defined contribution program, an employer offers a set amount of money that enrollees can use to purchase benefits. Defined contribution programs make employees more responsible for selecting providers and services.

“With the public exchanges, a big unknown is how many uninsured or marginally insured people are going to move over into these,” Cunningham says. “For private exchanges that are employer-driven, there really is not a winner or a loser. It’s a natural progression in some sense,” as employers look to continue offering benefits and provide more choices to employees.

Accountability: A Known

Just as employers are seeking to make plan participants more responsible for choosing care, on the provider side the movement toward accountable healthcare, also known as patient-centered care, has gotten a big push from reform.

“The ACA has completely accelerated the transformation and interest in financing new healthcare delivery models,” says Kimberly George, senior vice president and senior healthcare advisor at Sedgwick Claims Management Services. As a result, employers will have more options in coming years to control the costs of care, she says.

Evolution of accountable care organizations, or ACOs, and advances in digital healthcare such as telemedicine will usher in a new era for employers, she says.

Some of the major trends in healthcare reform that Sedgwick is seeing are increased access to coverage, quality of care and changes to the cost structure as more physician assistants and nurse practitioners become part of the system in coming years.

“The ability of an employer to influence the healthcare culture is stronger, and employers are beginning to look at health data,” George says. “But we need to make it measurable and actionable or we will see costs continue to rise. Brokers should begin to think about this culture of health and employees as a single consumer of healthcare. What models should they consider to bring value to their clients?”

A culture of health that involves plan members more deeply offers advantages in both productivity and claim costs, she notes.

“An engaged consumer in their health can be correlated back to an engaged employee,” George says. “Employees that are more health-aware may not be on disability leave or may not have a workers comp claim.” They may also not be a frequent user of group health benefits, and that will show up in productivity numbers, George says. “No matter the reason,” she says, “an empty seat is costing employers money.”