While the modest impact continues in 2015, there are a number of influences that the ACA may have on costs in the large employer market over the next few years.
Last year's Milliman Medical Index report noted that emerging reforms required by the Patient Protection and Affordable Care Act (ACA) had yet to show material direct impact on the cost of care for our family of four because this family is often insured through large group health plans. Some of the most far-reaching ACA reforms are focused on access to insurance in the individual and small employer markets and have more immediate impacts on premium rates in those markets.
Some of these influences will directly affect the large employer market--the Cadillac tax is the most visible such change--while others may be indirect, with spillover from provisions in other markets driving change in the large employer market.
Direct impact
Some employers with high-cost plans have begun to scale back their offerings in anticipation of the excise (Cadillac) tax on high-cost coverage starting in 2018. Those employer plans affected might initially be limited to outliers with extremely rich benefit plans. However, as illustrated in the excise tax figure below, it is simply a matter of time before other plans like the one tracked by the MMI are caught by the excise tax. Once the threshold is exceeded, the amount of tax will grow every year because healthcare expense trends will likely exceed the CPI index used to adjust the threshold to years beyond 2018.
While the MMI measures costs for a comprehensive PPO benefit plan, less comprehensive coverages have typically existed in the marketplace, such as scheduled benefit plans, which only cover specified services for specified amounts (e.g., a plan whose only benefits are $200 per inpatient hospital day). The ACA's requiring minimum values of 60% and removal of benefit limits may serve to enrich some of these plans and lead to more expensive "average" plan offerings.
While these regulatory pressures are forcing employers to strongly consider scaling back coverage and pushing more cost sharing onto families, employers recognize that their health plans may become unaffordable for many employees' families. The family of four represented by the MMI has total annual healthcare expenditures of $24,671, of which $10,473 is paid by the family, $6,408 through payroll deductions, and $4,065 in out-of-pocket expenses incurred at point of care.
These figures represent significant (and increasing) percentages of family income, particularly for middle-income families. The U.S. median annual household income in 2015 is approximately $53,800. Employee expenses estimated by the MMI total 19.5% of that median household income, 11.9% for premium contributions, and 7.6% for out-of-pocket expenses. With income growth at slightly less than 2% per year and healthcare expense growth over 6%, health insurance will likely become even less affordable for many working families and for employers. With provisions discouraging health insurance plans from being either too lean or too rich, the ACA ensures that the healthcare burden will continue to be shared by both employers and employees.
Indirect impact
As noted above, the ACA most significantly affects the individual and small employer group markets, with a more marked effect for those with individual (non-group) coverage. The number of people with non-group coverage is relatively small compared with the number of enrollees in the group market, even with increases in the individual market insured population that started in 2014.
Based on March 2015 baseline estimates by the Congressional Budget Office (CBO), there will be approximately 153 million nonelderly people in 2015 with employment-based coverage and 34 million with insurance purchased through an exchange, non-group market, and other channels. Therefore, the biggest ACA-related changes are affecting just a small portion of the total commercial market, so the fallout effects on large employers may be diluted relative to the effects on individual and small group coverages.
Nevertheless, there are various indirect effects we may see coming from the individual market and influencing our MMI family of four. First, price competition and new players in the individual market may cause lower provider reimbursement for the ACA markets than previously paid in individual markets. This could force higher reimbursement in the employer market as providers try to offset the difference. This same price competition may drive insurance companies to make up for lower profits or losses in the individual market by raising premium rates in the employer market. This impact will be mitigated by the relative size of the markets and by minimum loss ratio requirements, and because not all insurance companies operate in both markets.
In the other direction, arrangements made to encourage competitive premiums in the markets most affected by the ACA may spill into the employer market and reduce costs there. As noted in last year's MMI, transparency, experimentation with provider risk-taking, and focus on outcomes may ultimately affect the future trajectory of healthcare costs.
Exchange plans with extremely narrow provider networks have also been popular, due to their lower premiums, and those plans may get traction in the employer group market too. However, while MMI trends have been below historical norms in recent years, there is not clear evidence that the ACA caused significant reductions in healthcare costs, and trends appear to be moving back upward, driven in part by pharmacy.
Will premium for the MMI family trigger the ACA's excise tax?
Probably. It's just a matter of when. To answer this question, we translate the 2015 MMI into an implied premium, and compare it with the tax threshold. What we find is that the MMI family might hit the threshold within a few years of 2018, or possibly not until decades later, as shown in the table below. In this illustration, the answer depends on the rate of growth in healthcare costs and on the employer's size. Higher rates of growth in healthcare costs will push premium rates over the threshold more quickly.
The threshold increases annually too, but likely at a lower rate (2% in this illustration). Furthermore, the threshold is adjusted to reflect national cost trends, whereas a given employer's costs may change at a much higher or lower rate due to local conditions or other effects. Employer size also matters because it typically affects the portion of premium that is attributable to loads for administrative expenses and health plan profit. Larger employers tend to command lower loads, when expressed as percentages of premium. If the MMI family were covered by a small employer, its premiums would more likely trigger the tax, even if its healthcare spending were the same.
Sue Hart is a principal and consulting actuary with Milliman, based in Houston. This originally appeared in Milliman's Healthcare Town Hall.