2013 Employer Health Care Trends

Health Care Reform, Rising Insurance Costs &

Three Employment Strategies to Mitigate Them.
The face of American healthcare is changing. In recent
years, various reforms have been implemented and others
are pending. Following the re-election of President
Obama, and the Supreme Court decision to uphold the
constitutionality of the Patient Protection and Affordable
Care Act (PPACA), otherwise known as the Health Care
Reform, employers clearly recognize that it will have a
significant impact on health care and their business in the
years to come.
Confused by all the legislation, employers are fearful of
rising insurance costs and are hesitant to make any
significant changes to their current plans. However,
despite the potential changes coming to the US healthcare
market, they have no choice but to continue managing
these costs for their companies. Employers and human
resources professionals that are well-informed about
health insurance trends will be better suited to determine
the policies that will be the greatest benefit to their
companies.

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2013 Health Care Trends

According to the 2011 annual survey of medical cost trends, PriceWaterhouseCoopers
(PwC), estimates that US employers will see their health care cost to rise 8.5 percent in
2012 and 2013. That is 1.5 percent below the Aon Hewitt 2011 Health Care Trend survey
which estimates national medical care costs will increase by 10 percent. Health care
inflation is increasing at levels of three to four times the degree of national inflation. The
expectation is that these trends will continue, creating concern for employers as well as
employees struggling to afford medical coverage.
PwC identified two key factors likely to contribute to inflated medical costs in 2013:
Consolidation among hospitals and physicians. Hospitals and physicians are
aligning through mergers, acquisitions and other arrangements. Consolidating
providers is viewed as a way to reduce costs and improve efficiencies, but
health plan providers are concerned that it will reduce competition and drive
up rates.
Post-recession stress. The top three causes of stress over the past five years
- money, work and the economyare taking their toll on the American
workforce, according to the American Psychological Association. Health plans
and employers are witnessing a rise in claims for stress-induced illnesses which
are highly correlated to unhealthy behavior and adverse health conditions such
as heart disease.

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Confirming this trend, actuarial firm Milliman released its 2011 Milliman Medical index
in May, 2011. The report shows that the health care cost for a typical U.S. family of
four covered by a preferred provider organization (PPO) in 2011 was $19,393. This
reflects an increase of 7.3 percent over 2010. Even though the percentage of increase
was the lowest in recent years, the increase in total dollars$1,319 in 2011was the
highest in the history of the study. Of this $1,319, employers covered about 40% of
the increase ($641) while employees shouldered the rest$403 in payroll
contributions and $275 in additional cost sharing.

Employers React to Rising Costs &

Health Care Reform
In February 2011, McKinsey & Company conducted a survey
of over 1300 U.S. private-sector employers on the CEO or
CFO level regarding the impending changes legislated by the
Health Care Reform Act. According to the survey, rising
insurance premiums may drive many employers to
discontinue offering health coverage to their employees,
opting to pay a penalty instead. The survey found that 30%
of all employers would definitely or probably drop their
health care plans; of those employers with a high
awareness of the details of health care reform that
increased to 50%.
Ostensibly, seemingly high fines of $2000-3000 would be
enough of a deterrent to prevent employers from
discontinuing coverage for employees. However, in truth,
such penalties represent only about one quarter of the
health insurance costs these employers would have to pay.

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As part of a 2011 survey,

PriceWaterhouseCoopers asked
employers about changes they
are making in their benefits
plans in light of health care
reform. The survey found:
84 percent of employers said
they are likely to make changes
in plan design to offset expected
costs associated with the health
reform law.
86 percent said they are likely
to re-evaluate their overall
benefits strategy.
One-half are considering
significantly changing or
eliminating company subsidies
for dependent medical coverage.
PricewaterhouseCoopers' (PwC)
Health Research Institute, 2011
Medical Trend Survey.

A further challenge to employers is how to strategize

appropriately when forced to make changes to their health
plan design due to rising costs. On the one hand, they are
unable to absorb all of the cost increases, but on the other,
dont want to pass it all on to their employees. In contrast to
the challenge of making plan design changes is the
uncertainty of what health care reform will require of them
in the future. Employers are hesitant to make any significant
changes to their plans, such as reducing certain types of
coverage, if the PPACA will require them to include it at a
later stage. Or they are afraid of the consequences of losing

Employers continue to
be concerned about the
sustainability of health
care cost increases,
especially in the long
term, and they are
reacting by making
changes now.
Michael Thompson, principal, HR
services, PriceWaterhouseCoopers

grandfather status, even though they need to take action to

control the current renewals cost. The burden on employers
to make sense of this complex puzzle is frustrating, stressful
and time consuming.

Health Care Solutions

With so much uncertainty, what options do employers have to proactively keep their
rising insurance costs in check? Luckily, there are three methods that have been
growing in popularity over the past several years, each of which has proven successful in
containing insurance premiums and overall costs:

1.

Consumer Directed Health Plans

2.

Employee Wellness Programs

3.

Professional Employer Outsourcing

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Consumer Directed Health Plans.

Employers continue to explore consumer-directed health care plans (CDHC). These plans
are structured to give employees greater control over their personal health care costs,
thereby promoting caution before they utilize expensive procedures or request
unnecessary treatments.
CDHC plans offer higher deductible options, coupled with
Health Savings Accounts (HSAs) or Health Reimbursement
Accounts (HRAs) through which employees pay for out-ofpocket medical costs with their self-funded plans.

Accountable Care Organizations

An Accountable Care Organization (ACO) is a network of
health care organizations, hospitals and doctors that unite in
order to provide coordinated medical care to patients. Until
recently, health care in America has mostly been fragmented.
Hospitals, pharmacies, skilled nurses, primary and specialty
doctors operated as separate entities across the health
spectrum. ACOs, born as a result of the Health Reform Act, are
meant to integrate, coordinate and be held accountable for an

According to recent reports,

the consumer driven plans
are working - CDHC
patients were twice as
likely as patients in
traditional plans to ask
about cost, three times as
likely to choose a less
expensive treatment option,
and chronic patients were
20 percent more likely to
follow treatment regimens
carefully.
"Consumer Driven Health Care",
Networks Financial Institute Policy
Brief, Indiana State University].

individuals health care, generating better medical outcomes

at lower cost.
Studies performed on current ACOs including Mayo Clinic, Cleveland Clinic and
Intermountain indicate that delivering efficient health care would help reduce health care
costs by as much as 50%. By driving out inefficiencies, reducing unnecessary hospital

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admissions and applying the best approaches to clinical care, ACOs provide a promising
picture of affordable health care.

Micro Market Networks

Micro Market Networks operate in a similar vein to ACOs, without being quite as integrated.
Many insurance companies, including Blue Cross, Blue Shield, Health Net and United
Healthcare, are working on the initial phases of Micro Market Networks, with the intent to
eventually provide self-contained health care within the health care system. The result is
that health care plans would be structured around a single health care system in one region.
An individuals health insurance company may offer a variety of options including the
purchase of an independent plan that only includes access to a particular group of selfcontained health providers. The expectation over the coming two years is that many
regional networks of this sort will develop. The hope is that these Micro Market Networks
will operate in a similar fashion to ACOs, improving efficiencies and driving costs down.

Insurance Companies Purchasing Providers

In the past, insurance companies developed business relationships or partnered with
health care providers. A new trend, driven by the business and economic realities of
health care reform, is that insurance companies are actually purchasing health care
providers. Over the past year in Southern California, Anthem purchased the CareMore
medical group and United Healthcare purchased the Monarch medical group in Orange
County.

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These are two examples of entities uniting with the expectation of improving
health care outcomes and lowering costs concurrently. Whether this type of
endeavor will indeed be successful remains to be seen.
Facing an uncertain future, employers encounter the challenge of determining health care
coverage policies for their companies. Keeping informed and mindful of health care trends
will facilitate effective decision-making. Projections indicate a steady rise in health care
costs, which those with an optimistic outlook anticipate will be offset as various potential
solutions develop, reducing expenses and providing better quality care.

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Employee Wellness Programs.

As premiums continue to increase, employers are looking to promote employee
wellness programs to offset these costs. Well documented research indicates that a
balanced lifestyle including a proper diet, exercise and leisure time leads to
healthier and more productive employees. In turn, the employees medical
utilization is reduced, and health premiums drop. Additionally, a healthy staff will
have fewer sick days, be on time more often, and remain focused throughout the
day.
In contrast, other studies conducted on workplace stress
indicate that a stressful, unbalanced lifestyle can lead to
cardiovascular risk. And of course, as the health of an
employee diminishes, the utilization of health insurance
increases, thereby hurting insurance premiums.
A study in the journal Psychosomatic Medicine found that
men who report high job strain the combination of heavy
demands and little control at the office have thicker
carotid intima-media thickness (IMT). IMT is considered a

91 percent of employers
believed they could
reduce their health care
costs by influencing
employees to adopt
healthier lifestyles.
Harvard School of Public Health
as quoted in, The New England
Journal of Medicine.

reliable way of determining the early stages of

atherosclerosis, the narrowing and stiffening of the arteries.
One researcher on the project wrote, Prospective studies in older subjects have
shown that even a 0.1-mm increase in carotid IMT may increase the subsequent risk
of cardiovascular heart disease events by approximately 30%.

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The good news is that a vast majority of employers recognize the value of
implementing a wellness program in their organization. According to PwCs report,
89% of employers understand the connection between a healthy workforce and
reducing health insurance premiums.
Employers continue to be concerned about the sustainability of health care cost
increases, especially in the long term, and they are reacting by making changes now, said
Michael Thompson, principal, HR services, at PwC. Health care in the future will be very
different than we know it today, and uncertainty about these changes complicates health
care benefits strategies. However, the most proactive employers are planning for potential
future scenarios and making incremental changes now toward a longer-term view of
transformational change aligned around health and wellness.

What is a Wellness Program?

A wellness program can include anything from educating employees to be more conscious
health care consumers and promoting healthy lifestyle habits, to offering incentives for
weight-loss or exercise activity and offering free or discounted memberships to gyms and
health clubs. Alternatively, some employers incorporate penalties into their wellness plans
to dis-incentivize employees from engaging in an unhealthy lifestyle. Wal-Mart, for
example, recently imposed a $2000 per year surcharge for some smokers.
While this type of approach is somewhat controversial, it drives the message home that
unhealthy lifestyle choices out of the office impact employers costs and overall efficiency in
the office. Ultimately, a healthier workforce will reduce medical insurance costs and
improve employee productivity.

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Implementing a Wellness Program

How do you implement a wellness program at work? Here are 4 suggestions:
1.

Create a health-conscious corporate culture. For starters, replace junk

food with health food. If you have a vending machine, replace the chocolate bar with a
protein bar, and the bag of chips with a bag of trail mix or nuts. There are dozens of
healthy and tasty alternatives out there. Just shop around. If you have a soda
machine, replace high-sugar, caffeinated drinks with mineral water or decaffeinated
iced-teas.

2.

Offer health incentives and wellness

benefits. One of the most popular benefits that

employers can offer their staff is gym membership
reimbursement. Other wellness programs, such as
WalkingSpree, create walking clubs and competitions
to motivate and engage employees in a healthy
lifestyle. Other incentives can include paid
membership for healthy-lifestyle programs such as

Employers who offer

flexible schedules and
alternatives to the traditional
nine-to-five not only see
higher productivity, but also
save on health-related
benefits they already offer.
Sara Sutton Fell, Founder and CEO,
Flexjobs.com

Weight Watchers, yoga or spinning classes.

3.

Be flexible. Consider a implementing a flexible work-week, telecommuting

or offering alternative working-hours. Employees have a life outside the office, and a
flexible work environment makes employees healthier, happier and more committed to
your company. According to a Stanford University study conducted in March, 2012
telecommuters were four percent more productive than office workers, working more
hours and taking a larger workload.

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Ideas for flexible arrangements can include working 4 days per week at 10 hours per day,
instead of the traditional 5 days of 8 hours, giving employees one day extra off. Or staying
late on Thursdays allows employees to leave early on Fridays. Be creative, but be sure to
consult with a professional, as an alternative work schedule may have pay-related
ramifications.
4.

Encourage vacation. Most employees accrue vacation, or personal days

off. Everyone needs to recharge their batteries, so encourage your staff to take the
vacation coming to them. They will come back re-energized and ready to get back to
work.

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Professional Employer Organizations (PEO).

A third method to contain health costs and insulate your business from increasing
premiums is to engage the services of a Professional Employer Organization, or PEO. PEOs
were established in the early 1980s to offer payroll and insurance services to small and midsized employers. In the early days of the industry, PEOs were also known as Employee
Leasing or Staff Leasing firms.
As employment laws became more complex in the late 1980s and early 1990s, it expanded
to include all aspects of employee relations and staff development.
In a PEO arrangement, the PEO shares many of the responsibilities of being an employer,
such as paying payroll, filing and paying payroll taxes, providing workers compensation and
assisting their clients comply with labor law regulations. One of the most important aspects
of a PEO is its ability to offer clients Fortune 500 benefit packages and rates typically
inaccessible for small employers.

Economies-of-Scale
Economies-of-scale is the primary method through which a PEO can reduce an
organizations health insurance costs. Small employers with minimal payrolls and fewer
than 500 employees are often limited in the variety of health insurance plans they can offer,
their ability to negotiate with health carriers, and have less flexibility in administering these
plans. The net result is typically higher premiums with fewer options.
In contrast, by pooling hundreds, and even thousands of businesses, PEOs aggregate health
benefit plans and establish relationships with large regional insurance companies to offer
better plan selections with lower premiums.

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Risk Diversification
Another benefit of working with a PEO is that it provides the insurance carriers greater
stability by offering insurance coverage to employees in a broader employee base. The
pooled employees come from different industries and geographic areas which stabilize the
premiums over the long-term. This provides the PEO greater negotiating power at renewal,
thus typically keeping renewal rates below market averages.

Benefits Provided
PEOs provide small employers the unique opportunity to offer their staff a robust and
comprehensive array of employee benefit programs that are typically available to only the
largest corporations. These robust offerings include a wide range of major medical plans
and voluntary benefit offerings:
Multiple health insurance coverages
Dental and vision insurance
Life insurance
Disability and alternative insurance
401 (k) Retirement Plan
Pre-tax Cafeteria 125 Plans
Flexible Spending Accounts (FSA)
Employee Assistance Programs
Credit Union and financial services
Clients are assigned a benefits specialist and it is the PEOs responsibility to shop plans,
oversee open enrollment, manage all billing and financial matters, and address all employee
inquiries and administrative issues. The net result of this comprehensive PEO relationship is
the reduction of insurance costs, increased employee motivation and productivity, and the
ability of management to remove unproductive benefits administration from their plate.

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Conclusion
While the future of health care reform remains uncertain, there is no doubt that rates
continue to climb in 2012, and for the foreseeable future. Luckily, employers have several
opportunities to mitigate these increases, but it requires some initiative and out-of-the-box
thinking. To recap, there are three primary ways employers can reduce insurance costs:
1.

Consumer Directed Health Plans, such as Accountable Care Organizations

and Micro Market Networks, enable employees to control their health care costs by
cautioning employees to think before utilizing expensive procedures or requesting
unnecessary treatments.
2.

Employee Wellness Programs help employees lead improved and

healthier lifestyles. These leads to a reduction in medical utilization lower insurance

premiums and more productive employees.
3.

Professional Employer Outsourcing provides small and mid-sized

employers access to large-company benefits at reduced rates, utilizing the PEOs

economies-of-scale, negotiating power and administrative expertise.
Every employer needs to consider which method will work best for their organization. In
some cases, such as utilizing a PEO, they can incorporate all three systems to achieve the
greatest success.

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About CPEhr
Headquartered in Los Angeles, California, CPEhr is one of Californias leading Human
Resources Outsourcing and PEO firms. Founded in 1982, CPEhr assists hundreds of clients
representing over 75,000 employees with Californias complex regulatory and insurance
systems. CPEhr provides the following services:

HR Administration

Safety and Risk Management

Labor Law Compliance

Workers Compensation Insurance

Management Training

Retirement Planning

Employee Benefits

Payroll and Tax Services

Contact CPEhr
We encourage you to contact us and schedule a complimentary consultation. In this noobligation consultation a senior consultant will analyze your current employee benefit
structure and offer a customized benefit solution.
Call us:

877-842-4987

Email Us:

info@cpehr.com

On the web:

www.cpehr.com

Corporate blog: www.cpehr.com/blog

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Corporate Address:
9000 Sunset Blvd. Suite 900
West Hollywood, CA 90069

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