Concerned with employee retention, employers seek to reduce health care costs

Mid-year Economic Forecast

A decade ago, when Ross Bjella was president of Menomonee Falls-based DDN Pharmaceutical Logistics and overseeing 300 employees, health care costs were a major concern.

Now chief executive officer of a company that analyzes health care costs for employers, Bjella sees those frustrations among employers reaching a fever pitch.

“I think the frustration level has never been higher among employers about the inability to control health care costs,” he said.

While premiums have been rising more gradually in recent years – in 2016, premiums for employer-sponsored health insurance generally held steady from the previous year at $6,435 for single coverage and rose by 3 percent, to $18,142, for family coverage – they have increased significantly over the past decade, according to the Kaiser Family Foundation. Premiums for family coverage have increased 20 percent since 2011 and 58 percent since 2006.

With health care being the second-largest expense for most businesses, those rising figures have long concerned employers. Employees have certainly felt the sizable payroll reduction.

But now, as unemployment reaches a near 20-year low and companies experience more pressure to attract and retain workers, offering attractive benefits packages is all the more necessary. And it’s made the practice of continuing to shift the cost of health care onto employees untenable.

“Trying to keep and attract talent is putting a lot more pressure on the medical spend – that’s where the frustration is,” said Jim Mueller, president and CEO of Waukesha-based health benefits consulting firm Mueller QAAS LLC. “It’s putting pressure on this growing animal that was already out of control, (but) that employers could just push that cost down for the last three decades. It’s not as easy to do that when you’re trying to recruit and retain people.”

In a strong labor market, the current sluggish wage growth is puzzling, but it’s explained at least in part by the increasing burden placed on employees to cover health care costs.

“As (health care costs) have risen, the wages of workers in the U.S. have not risen, partly because their total compensation is being eaten up by health care costs,” said Scott Adams, an economics professor at the University of Wisconsin-Milwaukee. “So employers might be paying for workers, but less in terms of take-home wages because so much is going to health insurance.”

When it comes to employee retention, Adams said, small companies are at a significant disadvantage to their larger counterparts, which can offer health care at a lower cost.

Bjella, whose Milwaukee-based company, Alithias Inc., provides analytics services aimed at reducing health care costs, said costs have reached an unsustainable point.

“At some point, the house of cards falls over and something breaks,” he said. “I think what’s happened is the insurers are now saying, ‘I can’t trust the system to control these costs. I have to do it through aggressive plan design and making my employees become true consumers of health care.’”

“We’re seeing people adjusting their plan design to give their people options of high-value providers, but they’re only working with high-value providers who can guarantee prices or quality or warranty their work, etc.”

The desire to tamp down costs, Bjella said, means more employers will likely turn to reference-based health pricing, by which they set a cap on the amount they are willing to pay for specific medical services – $30,000 for a knee replacement, for example. Under such a system, it would be incumbent on the employee to make up the difference between the price and the amount his or her employer is willing to pay.

“Historically, employers have said, ‘We can’t do that,’” Bjella said. “Now, they’re saying, ‘Enough. We know what a fair price should be because we know what other providers can provide for this price and that’s all we’re going to pay.’”

The end result, Bjella said, is health care systems harmonizing their prices and ultimately driving down costs.

Mueller likewise predicts that mounting frustrations among employers will soon give way to greater transparency.

“The growing frustration on behalf of employers and employees at the cost of health care … I think, is going to put more pressure on transparency this coming year,” Mueller said. “Employers are not as complacent as they were in a high unemployment marketplace. They are shopping around and are more proactive.”

Any meaningful health care reform, Adams said, will have to encourage more transparency related to the price and quality of health care.

“The system of health care would need to have the consumers more informed and give them the ability to know the prices and incentives to actually act on that,” he said. “What we could at least do is try to move in a direction of consumers actually understanding what they’re buying and what it costs and what the quality is.” 

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