US corporate healthcare programs and the ACA

June 2013 | FEATURE | SECTOR ANALYSIS

Financier Worldwide Magazine

With the 2012 Presidential election a distant memory, and with the approval of the US Supreme Court won, the Patient Protection and Affordable Care Act of 2010 (ACA) will now be rolled out nationwide across the US. While the first elements of the Act come into effect in January 2014, the remainder will be phased in by 2020. Nevertheless, it is vital that companies begin to put systems in place in order to combat the rise in costs (and associated impacts) that will accompany the new law, especially given the already perilously high nature of the country’s healthcare spend.

While the full scope of the ACA is relatively unknown, rising healthcare costs are becoming an increasing concern for corporate executives and HR departments. A recent poll of senior executives by staffing agency Adecco SA noted that 55 percent of respondents namedhealthcarebenefits as their biggest current business challenge. In a similar survey carried out in 2007, only 35 percent of respondents identified healthcare as their primary concern.

The US currently spends an estimated $2.7 trillion annually on healthcare expenses, more than any other industrialised nation, and analysts have suggested that these spiralling costs are making US businesses less competitive globally. To further illuminate the point, the US spends an estimated 17 percent of its GDP on healthcare; again, this is higher than other developed nations. The nonpartisan Congressional Budget Office estimated in 2008 that without changes to federal law, that number would soon reach 25 percent. Sir John Oldham of the UK’s National Health Service has also voiced his concerns about the US’ accelerating healthcare spend. Sir Oldham noted in 2011 that he believes the US will spend 100 percent of its gross national product on healthcare by 2065, should current spending trends continue.

Equally, according to the US Chamber of Commerce, at 12 percent, healthcare is the most expensive benefit paid out by employers, making smaller businesses less likely than larger employers to be able to provide health insurance to their employees, both currently and certainly in the future.

The ACA, together with the Health Care and Education Reconciliation Act of 2010, represents the most significant government led addendum to the US healthcare system since the introduction of Medicare and Medicaid in 1965. While the adoption of the ACA has been controversial, the reforms are intended to increase the scope of health insurance coverage and reduce the overall cost of healthcare irrespective of a person’s sex or any pre-existing conditions from which they might suffer.

However, many analysts argue that the ACA, which was designed to not disturb employer sponsored health insurance plans (the largest sector of health insurance coverage already in existence), will actually drive up costs for both employers and ordinary citizens. Furthermore, analysts argue that these higher costs will place a substantial burden on companies operating in the US, putting them at a competitive disadvantage in the international marketplace. General Motors, for example, provides healthcare to over 1.1 million current and former employees, racking up a total of roughly $5bn a year on healthcare expenses. Accordingly, GM adds between $1500 and $2000 to the purchase price of every vehicle it produces to cover these costs.p>

It is clear that the ACA, and its legion of associated measures, will have a lasting impact not only on businesses but also on wider government spending. Indeed, analysts have suggested that the new laws will produce an additional $1 trillion in government spending.

Although the overall size of the impact is still up for debate, it is clear that costs will certainly begin to add up, impacting businesses both large and small. As a result of the ACA, companies will experience higher financial and administrative costs, which will in turn damage the US’ levels of employment and, therefore, productivity.

Smaller firms in particular will be at a disadvantage as the ACA contains a number of provisions designed to improve healthcare plans but which will ultimately continue to drive up costs for employers. Dr Robert Graboyes, writing for the National Federation of Independent Business, notes that “The healthcare law is laden with disincentives for businesses to grow, to innovate, and to hire. Businesses will experience higher financial and administrative costs, and both effects will diminish American productivity”.

While the scale and the impact of the ACA remain largely up for debate, a consensus appears to be emerging on businesses’ responses to the new legislation. The main tools for companies negotiating the healthcare minefield are wellness initiatives and waste reduction, particularly through technological investment.

Wellness

A survey conducted by Gallup Inc. in 2011 found that 86 percent of full-time employees in the US were either overweight or suffering from a chronic health condition that substantially raises their health costs. These workers missed an estimated 450 million additional work days a year compared with healthy workers. According to Gallup’s data the cost of this absenteeism, annually, is more than $153bn in lost productivity. Bearing this information in mind, it is little surprise that employer’s insurance premiums have risen by over 113 percent in the last decade.

In light of these rather damning statistics, wellness initiatives are a vital tool in helping to drive down the healthcare costs associated with the ACA legislation. The idea is that a healthy and challenging work environment will help minimise a company’s healthcare expenses. Prevention is crucial to combating rising healthcare costs, and by enacting wellness schemes and enabling lifestyle changes, companies can save over the long term.

Although 74 percent of US employers already have wellness programs in place, the effectiveness of these programs thus far has been negligible, as few employees have actively chosen to participate.

Many existing schemes offer incentives such as gift cards or reductions in employee premiums to staff who met accepted standards for blood pressure, body mass index and cholesterol, among others. Yet, although these reward schemes do somewhat boost participation, they have also led to accusations of discrimination against those employees who are too unhealthy to meet the expected standards.

However, the ACA will enable firms to offer better incentives to encourage participation and hopefully drive down absenteeism as well as employer healthcare costs. Where previous employee incentives have only marginally increased levels of participation, new directives issued by the US Department of Health and Human Services have been designed to “ensure that (such) programs are not a subterfuge for discrimination” against those employees considered to be less healthy. What’s more, the new rules ensure that companies cannot “shift costs to higher-risk individuals”. All employers who offer health contingent wellness programs will be required to “make available to all individuals who do not meet the standard...a different, reasonable means of qualifying for the reward”.

Essentially the new provisions on wellness initiatives will enable employees to benefit from incentives for merely participating in a wellness scheme. By engaging with a coach or nutritional expert, for example, and attempting to make a healthier lifestyle choice, employees will be entitled to rewards, such as reduced contributions towards healthcare premiums. Recent studies suggest that these wellness initiatives can have a positive cost impact for companies. A study carried out by Chief Executive Group LLC of four mid-sized employers with health-contingent wellness programs found that their total annual paid claims dropped to $2269 per participant, as opposed to $6187 for non-participants. Moreover, in 2010 Harvard health economist Katherine Baicker led a study which found that for every dollar spent by companies on wellness programs, “medical costs fall by about $3.27...and absenteeism costs fall by about $2.73”.

In addition to adopting these newly empowered wellness schemes, it is important that companies also adopt a top down approach to promoting wellness among employees. In its recent report, ‘CFO Insights: Bending the Cost Curve on Healthcare’, Deloitte notes that in order to make wellness a core value at firms, and therefore help keep a lid on costs, it is imperative that “plans should be top down, reinforced by benefits design and mirrored by the lifestyles of those in the C-suite. Otherwise education about using less salt in diets, exercising more and taking medications is simply wasted effort”.

Another method of driving down medical costs in the future, according to Deloitte’s report, is the need for a greater focus on obtaining relevant data about staff. In order to do this there must be an increased importance placed on HR departments. Although such research by HR departments will no doubt lead to personal information security concerns from employees, companies can better establish how and where the healthcare dollars are being spent by placing a greater emphasis on HR data.

By collating relevant data, firms can determine where money has been misspent on unnecessary procedures or in high costs areas, as medical costs can often vary from state to state. By utilising HR census data, firms can also establish which employees are eligible for certain types of wellness benefits, as well as helping to create a health profile for that workforce.

A further method of driving down costs in the post-ACA world would be hiring additional, internal medical practitioners or, if financially viable, a chief medical director or officer (CMO). Many firms have also seen that having a primary caregiver on the company’s staff can help reduce the amount of employees seeking specialist or hospital care, as well as improving outcomes and reducing costs incurred. As such, many companies have started employing nurse practitioners or a primary care doctors.

Waste

Experts have suggested that around 30 percent of medical care provided within the US healthcare system is unnecessary. What’s more, medical practitioners and patients have little need to minimise costs, particularly if the care they are receiving is covered by their medical insurance.

One of the best methods of helping to cut down on some of this unnecessary care would be better utilisation of information technology. Data held by the Commonwealth Fund suggests that although the US continues to have the highest per capita healthcare spend among industrialised countries, in terms of IT spending the US healthcare industry lags behind its international competitors as well as other domestic industries.

The ACA will no doubt continue to cause confusion and concern for individuals and companies alike. However, in order to keep costs to a minimum, it is imperative that businesses prepare thoroughly, promptly putting in place cost reduction methods.

Employee incentive programshave been shown to not only lower healthcare costs but also improve productivity. US based Corporate Wellness Magazine states that for every$1 spent on wellness programs, $4 in revenue is generated from reduced staff turnover, higher engagement levels and lower healthcare costs. So while there still appears to be many questions surrounding the ACA, the effectiveness of wellness schemes for driving down employer healthcare costs seems clear.

Richard Summerfield