Driven by rising costs and the Affordable Care Act, employee health programs are beginning to look like employee retirement plans. Using 401(k)s and other tools, administrators of those plans have spent decades trying to influence employees to save more money and make better retirement investment decisions.
Employers increasingly are approaching their health plans in similar ways, according to a recent survey. The result is a convergence that finds both types of plans trying to use incentives to change employee behavior even as they offload more key decisions and financial responsibility onto employees.
Beginning in the 1970s, employers began shedding traditional defined benefit pensions in favor of defined contribution plans. These newer plans limited employers' financial liability and shifted costs and responsibilities to employees. Federal tax breaks were approved to encourage employees to contribute pre-tax dollars to the plans and shield any investment gains from taxes until funds were withdrawn from the plan.
Now, health plans are fighting rising costs in much the same way, notes a white paper from Manning & Napier, an investment firm based near Rochester, N.Y. "The foundation [of the change] is really that shift in responsibility to the employee," says Shelby C. George, benefits strategist at the firm. "The employee is really the owner of their financial future, not only for retirement investments but now for healthcare as well."
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"What we've learned on the retirement side can be applied to the health side," she adds. "Convergence is really the idea that health and wealth are so related that you cannot improve one without also improving the other. You just need to be thinking about both."
George was quick to admit that retirement plans have hardly mastered the money side of this equation. Employees need to save more money and make better investment and spending decisions. "As an industry, we really have a long way to go."
But there has been widespread improvement in retirement plans in recent years, helped by the use of mandatory participation in retirement plans and default investments that are professionally managed. Savings rates and investment performance have improved. And many employers have expanded their efforts to influence employee savings and even lifestyle decisions. Those efforts are now being applied to the health behaviors of workers.
"Employers are becoming much more aware of the bottom-line impact of poor employee choices," George says. "That is really the motivating factor in wanting to change employee behaviors. And the employer bottom-line impact to health is felt more immediately" than in retirement plan choices. "So, health is what's really creating the emergency for employers."
In the paper itself, Manning & Napier makes the case that rising health care costs can contribute to financial stresses that actually worsen health and add to health expenses.
"While awareness of the health/wealth convergence has initially centered on the amount of money retirees may need to meet their healthcare expenses in retirement," it said, "the
reality is that wealth issues (or the lack of wealth) are just as likely to cause health issues." It cited research that the medical bills of stressed employees are nearly 50 percent higher than average and can lead to increased absenteeism and performance issues, particularly among older employees.
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"Yet another intersection between health and wealth is the employer impact of an aging workforce that is unable to retire due to a lack of savings and/or the need to retain employer provided health care insurance," the paper explained. "Medical claim costs generally rise with employee age, and for employees aged 60-64, average per employee costs are more than double the costs of employees aged 35-39," it added. "Employees who are not able to retire on time due to insufficient retirement funding may be adding costs to the employer's health plan."
In a review of cost trends, the firm noted the rising burden on employee health care costs and on insurance premiums:
Health care costs per person have grown by an average of 2.4 percentage points more than the Gross Domestic Product (GDP) since 1970, and in 2010 averaged just over $8,400 per person.
The share of GDP devoted to health care has increased from 7 percent in 1970 to nearly 18 percent in 2009 and 2010.
Average annual premiums for employer-sponsored health insurance in 2012 were $5,615 for single coverage and $15,745 for family coverage, with employers contributing $4,664 and $11,429, respectively. Using family coverage as an example, total premiums have increased from $8,003 in 2002 to $15,745 (a 97 percent increase), and employer contributions have increased from $5,866 in 2002 to $11,429 in 2012 (a 95 percent increase).
In response, employer health programs are moving in several directions that echo retirement-plan programs. The key elements of such efforts, the paper said, include:
Benefit plans that drive changed employee behavior, such as incentive payments for achieving wellness goals. High-deductible health plans and other consumer-driven approaches have placed more financial responsibility but also control with employees. "Employers with a greater commitment to employee health and wellness experienced average annual medical premium cost increases of 2 percentage points lower than those of other employers," the paper noted.
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Extensive employee communications efforts. These programs should focus on the need for savings in both health care and 401(k) retirement programs. Other clear and transparent features of communications should include:
• The estimated savings needed to retire comfortably, including the cost of health care in retirement.
• The importance of starting to save early.
• Information on the true cost of health care in different settings and potential for savings from different decisions, such as using generic versus brand-name drugs or receiving urgent-care treatments in a physician's office instead of an emergency room.
• Questions to ask physicians about the costs of different treatment options.
• Guidelines regarding health savings account contribution and withdrawal rules.
It also said employers should target special messages to individual employees who are not contributing enough funds to retirement programs or may need to consider changes in their decisions about health care and retirement investment options.
Lastly, the paper recommended that employers develop tools to help employees make good use of their health plans, including cost-comparison tools and tips on how to shop for better health care prices.