While chief financial officers (CFOs) in the U.S. have long been involved in decision making regarding the financing and cost management of employee health care benefits, the pace of change in the benefit environment is rapidly broadening and deepening the CFO's role. Not only are decisions around health care benefits becoming more complex, but they have implications for a wider range of interrelated business strategies and risks than ever before. The CFO's involvement has become crucial to business success.
Reining in annual cost increases is only one of the challenges. There are also the questions of whether to continue offering employee health insurance at all, whether to transition active employees or retirees to a private health insurance exchange, and whether and how to invest in health improvement and wellness programs. Looming over these issues is the risk posed by higher-cost health benefit plans — known as Cadillac plans — likely to incur the 2018 excise tax. The 40% excise tax on these plans could increase costs for nearly half of all large employers unless they make significant changes, or are able to materially reduce their cost base and rate of cost trend through more efficient care delivery and improvements in health risks of the population (most likely a combination of these).
Each of these challenges is considerable on its own. And their interrelationships form a complex web that requires the CFO to clearly understand the new business of employer-provided health benefits. Due to the magnitude of the financial risks involved, you can rightfully frame the CFO's involvement as mandatory in four specific decision-making areas: managing health benefit costs, financing the program and transferring risk, examining opportunities offered by private health insurance exchanges and investing in programs designed to increase productivity by improving workforce health.
Not only are decisions around health care benefits becoming more complex, but they have implications for a wider range of interrelated business strategies and risks than ever before.
Health care cost trends in the U.S., which have dropped somewhat in recent years, are estimated to average 5.2% in 2015 (4% for employers that make plan changes). Top-performing organizations with self-managed plans have enjoyed a four-year average cost growth of only 1.6%. And employers that have transitioned to Towers Watson's high-performance private health insurance exchange for active employees have experienced an average cost increase of 1.8%.
Despite these improvements in cost trends, employers are rightfully worried about the 2018 excise tax. As the law is currently written, the tax's indexing factor is set to roughly match the Consumer Price Index (CPI), and that's challenging organizations to improve program performance with the goal of moving from an average cost increase to a rate that's closer to the CPI. Today, the gold standard for many employers is a health care cost growth rate at or below the CPI — which means an increase of 2% or less per year.
Such an improvement in performance can't happen solely by fiat. It requires a clear understanding of the cost base and cost drivers, the changes that could improve performance, the organization's readiness for those changes and the potential impact of the changes on employees.
The CFO can be a strong advocate for a data-driven assessment and benchmarking of the program's cost factors (see box). It's important to place this analysis in the broader context of the program's annual, per-employee costs and overall efficiency, and to compare the results to those of your peer organizations. Health benefit costs vary by industry, and even within an industry, costs for U.S. employers can differ by as much as 40% to 50%. As health care benefits are a primary factor in total compensation, and ultimately in your unit cost of labor, this context can be vital in understanding the competitive advantage or disadvantage that your health benefit program provides.*
Factors affecting health plan cost:
- Demographics of the covered population
- Population's health status
- Services covered under the plan
- Unit cost of services for medical care and drugs
- Care delivery and medical management effectiveness
- Point-of-care cost sharing by plan participants
- Required premium contributions
- Consumer behavior
- Administrative costs, including risk transfer arrangements
Financing Your Program and Transferring Risk
There are also decisions to be made about financing and risk transfer. Historically, nearly all U.S. health plans provided by large employers have been self-funded. But there's been renewed interest in insurance, which many employers see as a way of capping plan costs or de-risking the plan in a manner comparable to de-risking a pension plan. This logic is fallacious, as health insurance is one-year term insurance, and any cap is of only a year's duration. Each year after the initial one, the group's actual claim experience rating determines the plan's costs, and premium rates are adjusted prospectively. Thus, insurance is merely a one-year cost fix for which the employer pays a hefty premium.
Virtually all larger employers have elected to self-fund for good reason: The incremental cost of insurance can boost plan costs by 6% to 11% due to state mandates, premium taxes, insurer risk charges, legislation-mandated levies on insured plans and other factors. In addition, corporate cash flow can be materially affected due to insurers capturing prepaid claim reserves, as well as margin requirements that result in cash outlays (as opposed to the employer maintaining these funds, typically on a booked rather than funded basis). When discussions turn from self-funding to insurance, the CFO should be at the table to weigh the incremental costs and cash-flow implications in a clear-eyed manner.
U.S. health plans are moving away from pure, discounted fee-for-service reimbursement for health care providers, and toward value-based contracting and reimbursement arrangements. This shift has growing implications for Finance. Unlike reimbursements in the past decade, when pure discounts reigned supreme, future reimbursements will be based on unit cost discounts and a host of other factors that include provider quality indicators, and improvements in operating efficiency and health outcomes for the provider's patient population. This will bring about two new financing phenomena: up-front charges and retrospective accounting.
It's important for Finance to understand the health plan's approach and charges, as well as the value it returns via improved quality, greater efficiency in care delivery and improved outcomes that will add value beyond the discounted fees being charged. At some future date, the employer's costs may move up or down based on the results achieved under these value-based contracts. Approaches vary dramatically by plan. The CFO should ask five questions:
- Are our plan reimbursements subject to a value-based contracting arrangement?
- What are we being charged for it?
- What is the projected benefit and how is it measured?
- How and when will a reconciliation occur?
- What, if any, performance guarantees accompany the arrangement?
Making the Private Exchange Decision
In thinking about transitioning to a private health insurance exchange, employers consider full-time, active employees and retirees. For Medicare-eligible retirees, the private exchange premise is clear: A decade of experience has shown that employers and retirees can benefit from transitioning to a private Medicare exchange. Employers can eliminate nearly all administrative burdens, deliver greater choice and value to retirees, and monetize subsidy commitments. Retirees can enjoy concierge-style assistance, a broader array of plans and often a lower premium cost.
This migration from employer-sponsored plans to private Medicare exchanges is accelerating rapidly. The CFO can be an influential partner in assessing the cash and balance sheet implications of such a shift for your Medicare-eligible retirees.
The private exchange premise for active employees is newer. And though nearly all employers are interested, many have decided to wait a year or so to assess its real promise. Can a private exchange deliver greater value than a traditional, self-managed plan? The results have varied. One major exchange has reported a 2015 cost increase that's higher than the average increase for self-managed, employer-provided plans. Another private exchange — Towers Watson's OneExchange — has kept cost increases within a range similar to the CPI.
Cost management is certainly a crucial consideration in exploring a private exchange, but the decision-making equation is complex: Can the private exchange's management construct deliver equal or better cost management and enable your organization to deploy its time, money, staff resources and technology more efficiently to control costs? And can the exchange's upgraded technology and member services deliver an enhanced consumer experience to your plan members? Finance can help you quantify these diverse components. With the CFO's help in weighing more than just the intrinsic costs, organizations can build a sound, overall business case for or against making the transition.
For the successful, pragmatic employer, close collaboration among HR, Benefits and Finance leaders is the key to creating — and sustaining — an effective health benefit program.
Increasing Productivity by Investing in Workforce Health
Finance is regularly challenged to invest in a plethora of employee wellness and health improvement programs. Employers overwhelmingly embrace the concept of keeping employees healthy and productive, but the pivotal question is: What's worth investing in?
Increasingly, we're seeing organizations answer that question after dividing their workforce health programs into two groups: programs that make a demonstrable impact, and those that employers consider to be their social responsibility and are expected to improve employees' health. In the first category are targeted care and condition management efforts. Effective care management can reduce costs and boost quality by 3% or more. And the management of conditions that materially affect health benefit costs, lost time and productivity can reap comparable results. These investments should be data-driven, and target the conditions and population segments with clear needs. The CFO can ask to see the data and translate it into cost avoidance, days lost and productivity gained.
By contrast, the results of broad-based wellness programs are difficult to quantify. Regarding those, your organization will need to make a qualitative assessment: What should you invest in to support your desired organizational culture and your articulated employee value proposition?
Recognizing That Finance Matters
As decisions regarding health benefits and workforce health become more complex, and their effects extend beyond health benefit plan management — and as economics shift and financing alternatives arise — the CFO's involvement in this decision making matters more and more. For the successful, pragmatic employer, close collaboration among HR, Benefits and Finance leaders is the key to creating — and sustaining — an effective health benefit program. One that's affordable for both the organization and employees in the evolving health care environment.
Randall K. Abbott is a senior strategist and a leader of Towers Watson's Health and Group Benefits practice in North America. He has over 35 years of experience advising many of the largest and most complex health plans in the U.S.