Balancing act

Finding ways to minimize health insurance costs is not a new challenge for Mike Godwin, the vice president of human resources for Eggleston, a Norfolk-based nonprofit.

The continuing rollout of the Affordable Care Act (ACA), however, is forcing him to add some new tricks to his playbook. As a result, this year he was able to take an initial 28 percent rate hike to his company’s health insurance premiums and reduce it to 15 percent.

“We want to take care of our employees as best we can and continue to be an employer of choice, and so our strategy is fluid right now,” says Godwin, whose firm provides education, training and employment services to people with disabilities.

He is not alone in searching for alternatives. Officials at Virginia companies large and small are exploring a variety of options, including the use of private health exchanges and self-insurance plans, in an effort to keep health costs down and avoid entanglements with potentially onerous provisions of the ACA. Nonetheless, many companies are finding that rising health-care spending is leaving them with less money for other employee benefits.

New tactics
Godwin has been trying creative tactics for several years to mitigate rising health insurance premiums. Full-time employees are now given a choice of plans: They can opt for a high-deductible health savings account (HSA), which is covered entirely by Eggleston, or a traditional health plan with a lower deductible that requires the employee to pick up 25 percent of the premium.

Godwin also dropped the company’s fully insured dental plan in favor of a “self-insured” model. That move requires Eggleston to pay the entire bill for all claims up to a certain threshold, but it enabled the company to save $10,000 in overall dental costs. Also, many Eggleston employees were reclassified as part-time workers under the ACA’s definition (working less than 30 hours a week), a shift that helped lower overall health premium outlays.

Still, Godwin has had to tweak plan designs even further this year to bring the latest rate increase down, adding, among other changes, a $150 deductible to the prescription drug plan. To help employees pay for their out-of-pocket increase, Eggleston gave them a 2 percent raise.

He plans to continue looking for other coverage alternatives to help the company and its employees cope with future cost increases. “We are just taking it year by year and trying to be as creative as we can to keep absorbing the premium hits,” he says.

New options
Rising health-care costs and concerns over new ACA conditions are making it harder for companies like Godwin’s to maintain the level of benefits their employees have come to expect.

An August report by independent consulting firm Towers Watson found that health-care costs for U.S. employers will rise, on average, 5.2 percent in 2015 if plan designs are not changed.

Year-over-year increases in health-care costs are cutting into spending for other benefits. Nearly all other employer-subsidized benefits, including dependent care, tuition assistance and professional and career development programs, have been on the decline since 2010, according to “Employee Benefits 2014,” a research report sponsored by the Society for Human Resource Management (SHRM).

“Health-care costs are becoming more of a major problem for employers, big and small,” says Dick Miller, an account director based in the Richmond office of Towers Watson. “And employers are searching around for ways that they can better manage those costs, better control those costs — not just in passing the costs onto the employees, but also trying to get at the root of the cause and trying to reduce costs for the health-care programs that they offer.”

In fact, the Towers Watson report found that 81 percent of employers are planning to implement moderate to significant changes to their health-care plans during the next three years in an effort to control costs. These changes include significantly reducing company subsidies for spouses and dependents (or denying coverage altogether to working spouses); using specialty pharmacy management plans to gain greater control over drug outlays; and setting up plans that encourage employees to, whenever possible, utilize telemedicine and “virtual” doctor’s office visits via telephone or Skype.

Other companies are limiting employee choices by offering a sole high-deductible plan or a health savings account in tandem with company-sponsored wellness programs, says Cynthia Weidner, vice president of health-care consulting for the Charlottesville office of HighRoads, a national benefits plan management firm. With this approach, she explains, “the employee has a powerful financial incentive to use medical services more cost-efficiently.”

Shifting responsibility
In other cases, employers are looking at a complete paradigm shift in their health coverage, using private health exchanges or adopting a self-insured or self-funding model.

A private health exchange is an online marketplace that provides employees access to a number of health plans and other insurance products. A private exchange puts more responsibility on employees to choose their benefits while helping companies cap their per-employee benefit outlays.

A growing number of organizations operating in Virginia now offer private exchanges — including the Virginia Farm Bureau, Virginia Chamber of Commerce, benefits consultants Towers Watson and Mercer, and health insurer Cigna.

Consulting giant Accenture estimates that 3 million people enrolled in private health exchanges this year and projects that enrollment in these exchanges will reach 40 million by 2018, surpassing the number expected to gain coverage through federal and state government-run exchanges like Healthcare.gov.

The private exchanges also provide an easy way for employers to offer a “defined contribution” or set an annual expenditure for employee health benefits. That feature, Weidner notes, is attractive to companies “who want to avoid bumping up against the Cadillac tax,” a 40 percent excise tax set to be imposed by the ACA on health plans that cost more than $10,200 for individual coverage.

“These private exchanges really enable what we used to call ‘flexible benefits,’ where people could take their benefits dollars and choose from between, say, two or three health plans, a dental plan, life insurance, and so forth,” explains Jackie Jackson, principal at Jack Consulting in Richmond.

“The private exchanges are different in that they’ve got the technology underpinning them so people can compare all kinds of different plans and features, and they can model things like, ‘If I take my life insurance up to $200,000, how much will come out of my paycheck?’ They give the employee a lot of control and choice, and a lot of people, especially the millennials, like that aspect.”

Many Virginia companies already are using the exchanges to serve their over-65 retirees. One is Richmond-based Dominion Resources, which moved its nonunion retirees to Towers Watson’s OneExchange last spring. Retirees receive annual stipends to use in paying for Medicare Advantage and Medicare supplemental policies and, if any funds are left over, they can spend the money on dental, vision and prescription drug coverage or out-of-pocket costs.

Wendy Wellener, Dominion’s vice president of human resources, says using the exchange “eliminates the market risk” of the self-insured plan that the company had been using and gives retirees the ability “to choose plans that best fit their needs.”

David Speier, a senior consultant at Towers Watson, says that many companies are scrutinizing private exchanges as a solution for current employees as well as retirees, but employers are largely taking a wait-and-see approach at the moment.  He expects midsize companies, which he defines as companies with between 500 and 3,000 employees, will be the first to switch their employees over to private exchanges.

“These companies are facing a decision between whether to build their own health-care program — or rebuild it because of changes brought about by the ACA — or basically buy insurance on a private exchange that provides all the necessary administration, compliance, enrollment and decision support tasks,” he explains. “There’s still some hesitance among the large companies because they realize that to some extent they’ll lose control over design, handholding and some of the other things an employer has always done with their own program.”

Weidner agrees but says that many large companies won’t move until their competitors do. “The exchanges are still a little new, a little untested and, with the ACA also being so new, they want to make sure that they’re complying with regulations, staying within budget and giving their employees and family members a good experience,” she explains. “They’re not sure just yet if the exchange can do that.”

Risk and control
Private exchanges enable employers to cap their own costs and gain efficiencies and savings in the cost and time involved in negotiating and administering health plans, but “it’s not a way to reduce the overall cost of delivering health care or plan premiums,” says David Barney, vice president of benefit services at Scott Insurance in Lynchburg.

For this reason, they’re not a fit for smaller companies, 11 million of which are facing large premium increases under the ACA, according to a 2014 report by the Centers for Medicare and Medicaid’s Office of the Actuary. Many will have little choice but to dump coverage altogether and send employees into public exchanges, Barney says, but some small employers are first taking a hard look at the self-insurance (or self-funding) model.

This approach requires employers to pay all of their workers’ claims up to a certain dollar threshold, at which point, a stop-gap or reinsurance policy, paid for by the employer, would kick in. A threshold policy can be set for the claims made by each worker or in aggregate.

“This has typically been a strategy for larger employers with over 200 employees,” states Barney. “But now, even smaller employers with as few as, say, 10 to 20 employees are looking at self-funding strategies. It’s where the largest amount of disruption is happening right now.”

Self-insurance is much more risky than traditional plans, since the employer is on the hook for the initial claims if an employee suffers a major medical event, such as a heart attack or cancer, but it also gives employers more flexibility and control over their benefits plan, Barney explains.

The employer can choose what benefits will be covered and the reinsurance premiums are underwritten according to the group’s overall risk, rather than the individual demographics used by the ACA. The model, Barney notes, also allows employers to dodge a 2 percent ACA fee imposed on traditional health plans, along with the added mandates and “messy pricing structure” involved with the ACA’s “essential benefits,” such as mental health, certain preventive services and maternity coverage.

“With self-insurance, you can also gain the positive impact of successful wellness programs,” he says. “If your employees get healthy and use less insurance, that’s a cost that might have materialized but you end up avoiding.”

Many insurance brokers, including Scott Insurance, have developed (or are planning to develop) “captive” self-insurance programs that allow small and midsize companies to work together as a group to share risk, gain administrative efficiencies and negotiate lower stop-gap premiums.

While companies are spending a lot of time researching the various new options and alternatives, Jackson notes that it remains to be seen which ones will actually take hold. She expects employers to continue developing creative ways to strike a critical balance between controlling costs and providing the benefits needed to attract and retain top employees.

“The benefits area is changing so quickly on a lot of fronts that companies are in this period of research and watch-and-wait to just figure out what they’re dealing with, how their benefits fit with what they want to accomplish as a business and what is the right benefits mix and strategy for the future,” she explains. “Everybody’s worried less about right now and more about: Where do we want to be in the next three to five years?”