Employers Brace for Health Care Reform-Related Cost Increases but Remain Committed to Subsidizing Employee Coverage

NEW YORK, May 25 /PRNewswire-FirstCall/ -- Although U.S. employers view controlling health care costs as their highest health care reform priority, few believe that the recently enacted Patient Protection and Affordable Care Act (PPACA) will stem the tide of rising costs, according to a May 2010 survey by Towers Watson (NYSE, Nasdaq: TW), a global professional services company. Despite these anticipated increases, nearly three-quarters of all large employers (74%) expect to continue to provide subsidized health care coverage for active employees.

When asked how important specific health care reform goals were to their organization, 96% of respondents pointed to the containment of health care costs as an essential or high priority, 88% said encouraging healthier lifestyles and 75% pointed to the improvement of quality of care. Despite these goals, nearly all employers (94%) believe that health care reform will raise their organization's costs. Additionally, 61% believe reform will have a minimal effect on encouraging healthier lifestyles, and 73% believe it will have either a negative or no impact on the quality of care.

"Employers are currently weighing the short-term challenges and long-term opportunities of the new law," said Mark Maselli, North American Health and Group Benefits Leader for Towers Watson. "While many employers have not yet assessed the full impact that reform will have on their businesses, they do realize that the responsibility to hold costs down will fall primarily on their shoulders."

In order to cope with anticipated cost increases, many employers plan on:

• Passing on increases to employees (88%)
• Reducing health benefits and programs (74% )
• Absorbing costs in the business (33%)
• Passing on increases to customers (20%)

At the same time, employers remain committed to many of the initiatives offered prior to health care reform, which were designed to hold the line on rising medical costs and improve employee health. For example, only 12% of employers said they would eliminate or reduce their wellness/health promotion programs in the wake of health care reform. In fact, 48% of employers believe that reform will increase employer offerings of wellness programs.

In addition, employers expect health care reform will result in an increase in adoption of total replacement consumer-directed health plans* (58%), and transparency of provider prices (37%) and of provider quality (35%).

The Future for Employer-Sponsored Retiree Health Benefits

Although employers remain firmly committed to providing health benefits for active employees, the same cannot be said for their retirees. Most employers surveyed (77%) believe that reform will reduce the number of large employers offering employer-sponsored retiree health benefits, and 43% of employers that currently offer retiree benefits plan to reduce or eliminate them. This trend is even more pronounced for employers likely to be subject to the excise tax on expensive plans. Of that group, 55% are likely to eliminate or reduce retiree medical programs.

"Just as many baby boomers are deciding whether to delay retirement, employers will be determining if it makes financial sense for them to remain in the retiree medical business," said Dave Osterndorf, a senior consulting actuary with Towers Watson. "Post-65 retirees already have a range of cost-effective options as individual consumers. Beginning in 2014, when health insurance exchanges become operative, pre-65 retirees will have access to competitive plan choices without preexisting condition underwriting. This important development will likely accelerate employers exiting sponsorship of retiree health programs and, in many cases, adopting account-based solutions."

Reassessment of Total Rewards and Workforce Strategy

As employers consider whether to contain costs by reducing benefits, coverage subsidies and plan options, many understand that an ancillary impact of reform will be new challenges to employee reward programs. More than a third (35%) of employers surveyed believe that reform will have a negative impact on their ability to offer a competitive total rewards package.

"Health care reform will affect the fundamental balance of reward programs," said Maselli. "This is a great opportunity for employers to examine their total rewards strategy and determine the right mix to continue to attract and retain top talent."

Additional Insights on Reform Cost Drivers

Towers Watson's health care reform survey also revealed employer perspectives on two significant drivers of health care cost increases: the excise tax on high-cost plans and coverage extensions to young adult dependents.

The primary cost driver that will affect many employers is the implementation of an excise tax cap on high-cost benefit plans. Nearly half (43%) of the employers surveyed believe they will be subject to the excise tax. Based on average annual cost projections, Towers Watson estimates that the tax cap will affect more than 60% of employers by its first year of implementation in 2018, with many more to follow soon after.

"To avoid significant tax penalties in 2018 and beyond, all employers will need to make structural program changes in the near term to moderate cost increases," said Maselli. "While the excise tax is potentially the most expensive provision, there are others that will drive up employer costs."

One such provision under the PPACA is the requirement for employers that offer dependent coverage to extend coverage to employees' children up to age 26. Only 16% of survey respondents indicated that they would implement this coverage extension before the mandatory deadline, and 78% said they would wait until 2011.

About the Survey

The Towers Watson Health Care Reform Pulse Survey drew responses from a cross section of 661 large organizations in the U.S. At the time of the survey, 90% of employees at respondent companies, on average, were eligible to receive health benefits.

The survey was conducted online in May 2010. More information on the survey is available at www.towerswatson.com http://www.towerswatson.com/research/1935.

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 solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.

* Towers Watson defines a consumer-directed health plan (CDHP) as a plan with a deductible offered together with a personal account -- a health savings account (HSA) or health reimbursement arrangement (HRA) -- that can be used to pay a portion of the medical expense not paid by the plan. A total replacement CDHP would mean the entire workforce would have only this plan option.

SOURCE Towers Watson