The Transformation of the Employee Benefits Landscape: Lower Actuarial Values, More Voluntary Products
A dramatic shift is taking place in health insurance, and it is requiring employers, employees, carriers, and brokers to think about benefits in a completely different way.

Here’s how the landscape is transforming:
  • Employers will be increasingly forced to offer plans with lower actuarial value, which will lead to fewer benefits being offered in most major medical plans
  • The reduction in benefits will create gaps in coverage that employers, carriers, and brokers will only be able to augment with other types of group and voluntary products
  • Through consumer-driven plans, individuals are being asked to share in more of the financial burden of healthcare than ever before
  • Employees are becoming more educated, demanding more choice, and placing greater value on the benefits component of their compensation than ever before
This evolutionary mutation of the employee benefit package will drive employers to:
  • Offer a comprehensive educational environment for employees to understand their benefit choices
  • Give employees a simple-to-use modeling and enrollment platform that will allow them to apply for and confirm the purchases of their plans in real-time
An optimal platform will need to be able to underwrite the application process for all of the products offered across all portfolio carriers, and it will need to be able to do that in real time. Otherwise, employees won’t be able to select the best mix of plans to meet their overall financial goals.

With this strategy and platform, employers will be able to minimize their healthcare expenses and allow employees to build the optimal portfolio to meet their needs.

Through consumer-driven plans, individuals are being asked to share in more of the financial burden of healthcare than ever before. Employees are becoming more educated, demanding more choice, and placing greater value on the benefits component of their compensation than ever before.
Why an Increase in Voluntary Benefits Products — and More Complex Benefit Portfolios — Is Inevitable
Under the Affordable Care Act (ACA), companies that offer generous, relatively high-cost health plans starting in 2018 will be hit with a 40 percent excise tax — a “Cadillac tax” — aimed at discouraging their use. In response, employers have already begun paring back coverage and steering employees toward the lower “60 percent actuarial value,” high-deductible plans that are permitted under the ACA. This is creating a new problem: a gap in coverage for employees.

To meet that challenge, employers have begun to offer a wider array of voluntary benefits products to complement and augment high-deductible plans. These voluntary benefit offerings — critical illness, accident, hospital indemnity, and other products — allow an employee to purchase insurance coverage that can alleviate, or at least address, the substantial hole in coverage that’s been created by the degradation of benefits that are available in major medical plans.

Employees can purchase a voluntary product portfolio that more appropriately suits their own profiled medical and financial risk. They can also purchase levels of coverage in increments that fit their budget demands.
  • From the employer’s perspective, these voluntary benefits have become an effective means to supplement certain core major medical plans and bolster the value of those plans to employees.
  • For employees, voluntary benefits are attractive because they offer greater choice and bridge the coverage gap created as the market shifts to higher-deductible, lower-actuarial-value plans. Employees also enjoy voluntary benefits because:
    • The application process is fast and easy
    • Most products have guaranteed issue or require only simplified underwriting
    • Products are competitively priced
    • Benefits are portable after current employment
Healthcare Reform: Why It’s Fueling a Shift to Consumer Directed and High Deductible Health Plans (but Not Private Exchanges)
The historic passage and Supreme Court approval of the Affordable Care Act (ACA) is already having wide and sweeping effects on employers of all sizes, forcing them to make new strategic decisions regarding employee health. According to a national employer study by Towers Watson, only 4 percent of organizations have no plans to recalibrate their benefits strategy in response to the ACA and related rising costs. Under the new law, large employers (50 employees and more) are poised to shoulder the greatest burden. Many organizations are already feeling the effects of the ACA through additional taxes and reporting requirements. But the most stringent policy changes — and the greatest shifts in the market — will be felt in 2015 and through 2018.

Most notably, employers will be required to offer all active, full-time employees “minimum essential coverage” — coverage that satisfies the government’s description of “essential health benefits.” Here are two key points to bear in mind:
  • The ACA defines full-time employees as those working 30 or more hours per week on a monthly basis (or on a look-back method for hourly employees).
  • Plans must meet two key mandates: affordability (the premium cost must be less than 9.5 percent of an employee’s W-2 income) and minimum value (60 percent actuarial value).
Employers that do not meet these standards will be required to pay a substantial “shared responsibility” payment. Employers will also be subject to an excise tax of 40 percent on premium “Cadillac” health plans starting in 2018.

In addition to the burden placed on employers, the legislation requires insurance carriers to meet specific standards in their major medical plans.

Carriers must use 85 percent of the premium dollars they receive toward the payment of claims for each plan. This only leaves 15 percent of the premiums received to cover the cost of administration, marketing, commissions, and premium taxes.

The net effect will be a trivial profit opportunity for carriers offering these major medical plans. In response, many carriers have begun developing new voluntary products that are not subject to the restrictive provisions of the ACA. Although large medical carriers will continue to offer major medical insurance, Benefit Harbor believes carriers will be placing significant effort toward rolling out new voluntary worksite products.
Shift to Consumer Directed Health Plans and High Deductible Health Plans
In response to rising costs exacerbated by regulatory reform, an increasing number of employers are shifting costs to employees through new benefit plan structures. In 2012, consumer directed health plans (CDHPs) were more prevalent than traditional HMOs for the first time in history.

The rapid growth of these high deductible health plans will likely continue in a post-reform world as employers seek plan structures that are more creative, and will jointly satisfy government policy and the need for competitive benefit plans to attract and retain top talent.

In the 1980s, employees saw a similar paradigm shift as employers were struggling to maintain costly pension plans. Employers began offering 401(k) plans as the retirement planning tool of choice. As more companies adopted 401(k) plans, employees realized they were investing their own money and demanded more investment options (e.g., mutual funds), more education (e.g., decision support tools), and easier enrollment and reporting (e.g., online portals).
Public and Private Exchanges
One response to all these industry challenges has been the emergence of exchange solutions. A number of public and private entities have offered an exchange solution, or marketplace, upon which employees may purchase major medical plans.

Though the notion of a wide-scale move to health insurance exchanges has garnered headlines, the exchange model in practice has a number of limitations.

The greatest limitation is that medical insurance, for the most part, is not designed to be sold in a market-competitive environment. Medical insurance is a financial instrument premised upon the notion that many pay in and only a few take out each year.

A general rule of thumb is that 10 percent of the population accounts for about 90 percent of the claims dollars in a given year. This model works well when employees are offered a limited number of options that fall within a narrow band of price and scope of benefits. However, as the number of plans offered grows with greater differentiation between price and benefits, many plans will struggle to maintain their financial viability. Young, healthy, and cost-conscious consumers tend to purchase cheaper, lower-cost benefit plans that, by default, are taking away a lot of the financial support of the more expensive, higher-benefit plans.

The ultimate outcome will likely be a leveling out of major medical plans at the ACA- legislated 60 percent actuarial value minimum (down from the 80 to 90 percent actuarial value plans historically). The industry is already witnessing this dynamic in the exchange environment. The result will be more voluntary workplace solutions through which employees can purchase, customize, and rebuild their benefit portfolios as their personal situations require.