This employer will retain its plan because it will be affordable to do so, its employees will want it to continue offering coverage, and it will be using its plan to leverage the total value of its workforce's health, which will prove to be a significant, long-term competitive advantage.

Rising health care costs: the indefinite truth
The root cause of any employer's rising health plan costs is the steadily declining health of its insured population. America's workforce is getting sicker for a number of reasons. First, as they age, individuals naturally progress from having few health risks to developing numerous health risks and chronic conditions. Second, societal changes contribute to deteriorating health.

For example, technological innovations save labor and time, but result in more sedentary work and home lives. Third, the ever-increasing stress that employees experience leads them to engage in unhealthy behaviors like smoking, drinking and eating poorly. As a result, more people than ever before are now overweight, hypertensive, diabetic and suffering from one or more chronic health conditions. Employers try to contain their health plan costs in a number of ways.

Most of their strategies are ineffective, however, because they fail to address their insured population's declining health. For instance, shifting more plan costs to employees does not address their health, and it prompts some (usually the healthiest) to simply drop their coverage.

Discouraging use of medical services by imposing large deductibles, co-pays and/or co-insurance likewise does not address health, and it deters employees from using services that help them maintain or improve their health. Consumer-directed health plans also do not address health, and they can discourage employees from seeking preventive or even diagnostic care because they do not want to spend “their own” money.

And even most wellness and disease management programs are ineffective because they are primarily reactive, fail to engage enough insured employees and spouses, place too much emphasis on individual, rather than cultural, change, and focus primarily on higher-risk employees while largely ignoring lower-risk employees.        

The Patient Protection and Affordable Care Act will also not help contain health plan costs in the near future, as it ended up being more about expanding coverage than reducing costs. In fact, it will likely contribute to increasing costs for at least the next several years by expanding coverage for young adults and children, removing lifetime cost and pre-existing condition limitations, and imposing new taxes on pharmaceutical and medical device companies.

The insurance, drug and medical device industries will inevitably pass these costs on to employers. Health insurers will also likely increase premiums more than necessary while they still can. Then, when 2014 arrives, over 30 million formerly uninsured people will begin to obtain health insurance coverage, start seeking postponed care, and discover and treat previously undiagnosed conditions. New fees for health insurers also take effect in 2014. The ACA will therefore not begin reducing plan costs until 2014 at the earliest. 

Cost of terminating plans outweigh benefits
Contrary to what many analysts predict, the cost/benefit analysis for terminating a health plan will not be as simple as merely calculating the difference between what a company pays to provide coverage and what it would pay in penalties if it dropped its plan. Those perceived “savings” will be only one factor in the equation. Reasonably assuming a more competitive labor market by 2014, an employer will also have to factor in the cost of keeping its employees financially “whole” in order to retain them.

At a minimum, the employer would have to increase wages enough so employees could purchase coverage from an exchange insurer. Employers will also have to consider the benefits they derive from retaining their plan, including their workforce's appreciation, respect and loyalty, and their ability to actively manage their employees' health. From a purely financial perspective, it is not at all clear that the average employer would save any money by dropping its health plan in 2014.

In fact, researchers who have simulated the ACA's effects, such as Bowen Garrett and Matthew Buettgens of the non-partisan Urban Institute, have found the opposite to be more likely – total employer spending on premiums, assessments and vouchers will likely be lower under ACA than without reform.

Specifically, the average employer with 100 employees or less will likely pay 7.9 percent less to insure its employees under the ACA, while an employer with 101 to 1000 employees and an employer with more than 1,000 employees will likely pay 1.1 percent and 3.1 percent less, respectively.

Some of the reasons for this include: the significant tax advantages employers and employees enjoy with employer-based group insurance; the fact that most employees have total household incomes above the threshold at which it would be less expensive for their employer to continue insuring them as opposed to subsidizing their exchange-based coverage; the fact that only a small percentage of lower-paid employees select family coverage (thereby reducing an employer's savings from eliminating their coverage); and the fact that higher-paid employees tend to be older than lower-paid employees (thereby increasing how much employers would have to subsidize these employees' more expensive age-rated, exchange-based coverage).

The average employer should be able to use the ACA's “play or pay” mandates to save money by retaining its plan, but modifying the plan's design and subsidizing it only to the extent that it makes financial sense to do so. To begin with, employers will only be required to offer “minimum essential coverage” plans that are “affordable” in order to avoid the $2,000 per employee penalty. Most employers' plans already offer minimum essential coverage.

Additionally, these plans will only be required to cover 60 percent of covered plan expenses. Most plans currently cover a higher percentage of plan expenses, so there is room to modify them to save money. Moreover, these plans will be considered “affordable” under the ACA (and therefore sufficient to avoid a $3,000 per employee penalty) if they do not require an employee to contribute to his premium more than a certain percentage of his total household income.

Factoring in a spouse's income, most employees' total household income is high enough to render most employers' plans affordable to them, thereby making them ineligible for subsidized exchange coverage. Employers will therefore be able to strategically determine the rate at which they will subsidize their plans so they will continue to cover only those it knows it can insure for less than if they obtained exchange coverage and then sought reimbursement.

As for each employee the employer cannot justify covering, it will simply pay the $3,000 penalty plus the small, subsidized cost the employee pays for affordable exchange coverage.

The value of health coverage
But it's not just about dollars and cents. Employers will also have to factor in the cost of breaching the psychological contract they have established with their workforce. Of all the benefits a company offers, employees value health coverage the most.

They also highly value the assistance that most employers provide in navigating the complexities of health care services and insurance claims. Employees would therefore view their employer terminating coverage as a major breach of the psychological contract, demonstrating a lack of concern and severing an important connection. Health care reform in Massachusetts provides an example of the psychological contract in action.

There, reform law mandated that all individuals purchase coverage. When employees of companies without health plans could not afford coverage in the individual market, they asked their employers to offer coverage. Most employers did, choosing to honor the psychological contract rather than risk losing employees to competitors with health plans.

As a result, between 2006 and 2009, more Massachusetts employers offered health insurance coverage than before the law took effect despite state unemployment rising by 4.5 percent during that same time period. Many experts predict the same thing will occur under the new federal law.

So what are employers supposed to do if their health plan costs are guaranteed to keep rising, yet the hard and soft costs of terminating their health plan in 2014 will outweigh the benefits? Employers need to do the only thing that works to contain health plan costs – improve their workforces' health. 

Managing workforce health
Regardless of how health care reform plays out, employers will need to continue to hire good people and obtain their best efforts in order to succeed. The problem, however, is that most employees, when left alone, will not maintain their health, and unhealthy employees will never perform at a high level.

Employers must therefore take advantage of the enormous opportunity they have to influence their employees' behavior. The most effective way to do this is to retain their health plan and use it to improve their employees' health. This will not only reduce health plan costs and increase productivity, but it will provide employers with a significant competitive advantage.

Historically, employer health promotion initiatives were little more than a leap of faith.  Management always knew, intuitively, that a healthy workforce costs less and is more productive, but they did not know where to focus their health promotion efforts. They were also unable to measure the cost savings or degree of increased productivity that they were achieving in return for their health promotion investment.

Heavily investing in health management was therefore considered risky due to the uncertain return on investment. Investing in health management is no longer a leap of faith. In fact, many proactive companies now have health management down to a science. With the benefit of decades of research involving hundreds of companies and millions of employees, we now know exactly what does and does not work to reduce and contain health plan costs.

For example, using data mining and predictive modeling technology, employers now have the ability to accurately predict how much they will spend in future years if they continue doing exactly what they are doing versus aggressively managing their workforce's health. These employers do not wait for their next group of large claimants to reveal themselves in the form of shock claims.

Instead, they identify their highest-risk employees and get them the help they need before they actually incur large claims.  Numerous studies and surveys reveal the significant, positive returns on investment that proactive employers realize by aggressively managing their workforce's health. These studies all lead to the same conclusion: “high-performers” (those with a strong health promotion culture and an aggressive health management process) enjoy significantly lower health plan costs and otherwise outperform their competitors by leveraging the total value of their workforce's health.

The total value of health to a high-performer is much more than just the value of the medical and pharmaceutical claims costs it prevents or postpones by keeping its employees healthy. It includes the value of reduced employee time away from work due to sickness, short and long-term disability, and injuries. It also includes the value of decreased “presenteeism” – employees' unproductive time while at work caused by chronic health conditions.

As more employers come to appreciate the total value of health, they will stop focusing on what they think they might be able to “save” by terminating their health plan and instead will focus on what they stand to gain. They will realize that they need to get significantly more –not less –involved in managing their employees' health, and they need to start doing so immediately. They will create a strong health promotion culture and aggressively manage health.

And once they gain control of their plan costs and begin realizing their own TVH, they will choose to maintain that control as opposed to turning their employees over to exchange insurers where no one will be managing anyone's health. As a result, they will enjoy a significant competitive advantage over those who opt to simply give up and get out of the health insurance game.

Brad Warrick is the managing member of Warrick LLC, which specializes in change leadership and management, reducing health plan costs and improving productivity. Brad can be reached at [email protected] or 434-295-0590.