Behind the Trend Why Health Benefit Cost Growth Is Slowing

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Behind the Trend Why Health Benefit Cost Growth Is Slowing
Calendar20 June 2014

After seven years of health benefit cost increases right around 6%, we saw cost growth slow to 4.1% in 2012 and then to just 2.1% in 2013 (according to Mercer’s National Survey of Employer-Sponsored Health Plans). And although employers predicted that cost would rise by 5.2% on average in 2014, for the past two years actual increases have come in lower than expected. So it’s reasonable to assume that this year we will again see a fairly narrow gap between the trend lines for health benefit cost, inflation, and workers’ earnings. While the economy and improvements in provider efficiency account for some of the slowdown in health benefit cost, as a new analysis of benefit cost demonstrates, high-performing employer plans are having a major impact.


Slower utilization driving lower cost growth

The last prolonged period of low health benefit cost growth was back in the 1990s. There was an obvious explanation – the market was undergoing a rapid transformation from traditional fee-for-service indemnity plans to network plans with negotiated provider fees.

This time, the change in trend is being driven by lower utilization rather than falling prices. Economists have attributed some of the slowdown in utilization to the dampening effects of the recession -- in times of economic uncertainty, people put off getting care. Other market factors include the less-rapid development of new medical technology and pharmaceuticals and improvements in provider efficiency and quality. An article in Health Affairs points out that targeted health-care quality programs like the LeapFrog initiative have helped lower the rates of hospital-acquired infections and readmissions. But only a portion of the change in trend is attributed to the recession and market efficiencies. The study’s authors also credit the actions of employer health plan sponsors with helping to slow utilization -- and we can validate that with our own data.

To understand what high-performing organizations are doing right -- and what other employers can learn from them -- we analyzed the data collected through our annual survey of nearly 3,000 employers to study the relationship between health plan cost and a broad range of about 20 specific health plan management strategies. We divided survey respondents with 500 or more employees into four equal groups based on the number of best practices they used, and then looked at average cost for the employers in each group. What we found was that the average health benefit cost per employee for employers using the greatest number of these best practices was 8% lower than for employers using the fewest. 

This is especially important information for employers that are behind the curve in terms of cost performance. While the average cost trend has fallen, there’s a wide variation. While about one-fourth of large employers expect cost increases of less than 5% in 2014 (before making changes), about one-third expect increases of 10% or more. In other words, there are still a lot of employers out there that could benefit by implementing strategies other employers have used successfully to reduce health care utilization and, with it, cost. Our best practices analysis demonstrates that the organizations that are the most successful in controlling cost have waged the battle on a number of fronts.

Employer best practices make a big difference

  • Giving employees a financial stake in their health care decision making through cost-sharing, consumer-directed health plans, and value-based design.
  • Using data warehouses to identify and address cost drivers.
  • Providing special services to the highest-cost portion of the population to ensure they get the most effective care.
  • Engaging employees in learning about and reducing their own health risks.
  • Taking steps to ensure employees have access to providers that have demonstrated that they can deliver effective care at a lower cost -- in centers of excellence or medical homes and through telemedicine.

What’s next?

With health reform putting pressure on cost from new fees, expanded eligibility, and required plan design changes, even the best-performing employer health programs will need to look for new sources of savings if they are to continue to provide employees with attractive benefits at a sustainable cost. The excise tax on high-cost plans looming in 2018 provides even more incentive to double down on cost management efforts.

Having experienced success in bringing cost growth under control, employers are more willing to explore emerging cost-management approaches that promise new gains. Private health care exchanges address the issue of over-insurance -- the fact that many employees today are paying for more coverage than they need. Offering employees a range of medical plans and voluntary benefits on a single platform allows them to expand choice and further engage employees in selecting coverages that meet their needs -- a logical extension of the consumerism concept that has been so successful. Exchanges make it easy to move to defined contributions, should an employer choose that approach.

The good news for employers already in the forefront of cost management is that there are still new strategies to explore. As health reform unfolds, employers will need to double down and build on past successes to keep up momentum in the health care cost battle.

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