Jason Redlus: Mindy and Sharon, please start by telling us about your roles at Mercer.
Mindy Fox: I’m responsible for Mercer in the United States. Health and benefits is our largest business in the U.S. This is probably one of the most exciting times in our business. A host of issues are affected by the provisions in health care reform.
Sharon Cunninghis: I’m Mercer’s U.S. health and benefits business leader.
What does the term ‘health and benefits’ mean?
Sharon Cunninghis: It refers to how clients manage their workforce and their workforce strategy. All employers are impacted by the U.S. health care reform. All of them face additional costs associated with their programs. Some industries, such as retail or hospitality, face additional costs associated with hiring people who may be part-timers but who work more than the minimum 30 hours per week and need to be brought into their health care programs. For many of those employers, their programs today don’t meet the definition of affordability from the federal government’s perspective, so they have to decide what their future workforce is going to look like in a way that helps them manage both the cost of their business as well as U.S. health care reform and its minimum requirements.
How are companies coping with this business challenge?
Mindy Fox: A fair number of companies are taking a ‘wait and see’ approach. Some thought that the Supreme Court would, if not overturn the reform act, modify it in some way. When it was upheld, you could feel the momentum changing for many of our clients. Across different market segments, there is an increased visibility into what they need to do now, particularly since they are facing a relatively short timeframe in terms of provisions that will take effect in 2014. Now companies are looking at the implications of certain provisions on a more granular level. Some provisions have yet to be defined, but they are going to affect everyone. I don’t think that there’s an organization, including our own, that doesn’t have people on the payroll who are classified as temporary and there are implications to that. In the health care industry, for example, nurses who are hourly employees typically aren’t offered benefits. What about companies that hire office temps?
Companies need to take stock and conduct a health care reform checkup. They need to look at their current state and then examine the options. When you start to consider part-time employees and temporary workers, who you have to cover, and the cost of that coverage, the CFO needs to get involved, because now you’re looking at broader workforce implications of not only the cost of covering those people but, if you want to manage that cost, possibly redefining how you will deploy your workforce. These are pretty heady issues for some companies.
Sharon Cunninghis: Right after the law was upheld, the following Monday, we held two town halls for employers and we had more than 4,000 attendees. We did live polling during these discussions and found that more than 50 percent of participants said that they had not prepared at all for health care reform. For the overwhelming majority, they now believe that they need to prepare. There’s still a small group holding out, but the majority realizes that they need to get started. As we travel and talk to clients about performing a health care reform checkup to make sure that they’ve covered all the provisions, are prepared, and have thought about the workforce implications, a couple of issues pop up. One is the excise tax, which is looming in 2018. What that means is if an employer’s plan costs more than a certain threshold specified by the federal government, an excise tax will be applied. That caused everybody to sit back and say, ‘I need to have a new strategy in place so that I don’t get hit with that excise tax.’ If you think about that from a timing perspective, everybody’s running around now trying to prepare for 2014. There is a fair amount of information that has to be communicated to employees by this fall and by March 2013, which already puts us at open enrollment for 2014, which is not too far away. So, with open enrollment coming up and the excise tax only a few years after that, companies that are considering changing their entire health care program strategy and preparing their employees for that change really need to get started now. That’s a big part of our discussions with clients.
Mindy Fox: Over the years, most companies have tried to lower their costs by skimming the top or, in some cases, taking the fat out of the system. Now the choices they have to make to manage their health care costs are more radical. Radical doesn’t mean bad, but it means that they have to move that dial and, in doing so, consider a large change management process. To get ahead of it, companies have to communicate with their employees so that they can make some of these changes. Consumer health-directed plans (CDHP) are one example. They have value and they may have a place for certain employers. But people have to understand how to use them, access them, and change their behavior. We all know that it takes time to move the dial to change a culture as well as people’s behaviors.
We’re working with clients now who are looking at 2015 to put in a CDHP but they are beginning the change management communication process now because they know that in order for it to be successful, they’ve got to travel some distance and begin communicating with their employees. A year ago, we had a workforce that had seen significant staff reductions. I don’t think there’s a single company that hasn’t felt that pain. We’ve seen compression in terms of base salary, bonuses, and how they buy or supplement their benefits. So moving that dial to health and wellness programs or CDHP is not an easy task, but it is going to be a necessity.
The concept of change isn’t always greeted as good news. Are companies looking at this as an opportunity or a challenge?
Sharon Cunninghis: There are some very positive opportunities. Yes, there’s change management that comes along with any change and that involves communication and engaging the employees. But many of the strategies that employers are talking about today could actually be very positive for employees. Beyond this notion of consumer-driven health plans, which in many cases are significantly lower in cost than traditional preferred provider organization (PPO) plans that many employers have today, we’re finding a significant uptick in interest around health management and wellness programs. And frankly, from a personal perspective, if somebody is going to help me manage my health and my health improves, that’s a good thing. That’s a win not only for my employer but for me as well in terms of improved health.
We’re also seeing employers who are concerned about access to primary care. Now that we’re going to put more people into the insurance system, they’ll want to see primary care providers. Some employers are wondering how they can create more options around primary care for their employees. As a result, we are seeing more employers set up on-site clinics, particularly if they have a facility with enough people where it makes sense to have a clinic with a nurse practitioner or part-time or full-time doctor who can treat minor illnesses and provide wellness programs for people, such as biometric checks or cholesterol tests. Other employers are adopting telemedicine, which basically means that if you have a minor ailment, you can visit a doctor online, sitting in front of a computer screen so the doctor can see you, and the doctor can help you deal with whatever issue that you have. From a member perspective, these are things that I would view as very positive. Instead of it taking me three days or a week or a month to get a doctor’s appointment, my employer has now provided that access for me.
Another area where we see additional focus is around identifying the highest quality, most cost-effective providers, whether they’re doctors, hospitals or facilities where you may go for an X-ray or an MRI, and providing people with enough information to make informed choices. Again, that’s a win/win for members if they feel that they’ve received good care at the right cost.
All of these efforts require communication and engagement with employees because they have to understand what’s available to them and how that might be different from what used to be available. But at the end of the day, it should be a very positive experience for employees and, in some cases, their families.
Mindy Fox: For many people, such as CFOs and those in HR, health care has often looked like this black hole, so when Sharon talks about on-site clinics as an example, Mercer is now able to look at health care as not just a black hole. We can build a business case, look at the underlying data, assess what the ROI might be, and be sure that our investment provides that return. I don’t want to say that health care is a business, but you can put metrics around it and determine what the return on investment is. In this case, you’re dealing with not only the health status of an individual but their productivity and their family’s well being. We know that the broader set of implications is relevant to the workforce, and it can be quantified more than I think was true in the past.
If the foundation of health care reform may change as a result of the upcoming presidential election, are companies at a standstill or do they need to move ahead irrespective of a possible change in national leadership?
Sharon Cunninghis: I think companies have to move ahead. We know what the law is and it has been upheld. A number of provisions have already been implemented by employers, such as the extension of health care coverage to children up to age 26. There are certain things that employers need to address in the fall during this year’s open enrollment to employees, like providing a summary of benefits and coverage. In the spring, they will need to communicate to their employees about public exchanges. So there is no ‘let’s wait and see what’s going to happen.’ There are requirements that have very specific dates.
We are still waiting for regulations in some areas. Most of those are around how to implement and measure certain components within the law. Mercer tracks where things stand in terms of regulations; we have people in Washington, D.C. who do that on a regular basis. But our advice to everybody is ‘keep moving.’
What guidance can you offer portfolio managers who have large stakes in publicly traded companies and want to know how health care reform is going to affect these companies’ earning statements?
Sharon Cunninghis: The most recent survey that Mercer conducted found that 60 percent of employers expect some increase in costs because of the Patient Protection and Affordable Care Act (PPACA). One-third of those expect an increase of 5 percent or more. Now that’s above and beyond what they’re already seeing in terms of health care cost increases, which could be running in the 6 to 8 percent range at the baseline. So they’re adding up to 5 percent or more on top of that.
Is that adjusted for inflation? Or is that a real hard 5 percent?
Sharon Cunninghis: That’s a real hard 5 percent. Going back to what we talked about before, when you look at certain industries, like retail and hospitality that have lots of part-time workers, about 46 percent of those companies feel that their costs will be pushed up by 3 percent or more. So it does beg the question ‘What do I do?’ This goes back to conducting a health care reform checkup. The first item on the checkup list is for companies to understand, from a qualitative and quantitative perspective, how each line item impacts them. What are the workforce implications? Which members of their workforce are they going to provide medical benefits for? That’s a first step, and while it sounds simple, it’s not because if an employer decides to move some full-time people to part-time so as not to provide benefits, that might alter productivity. It’s really important that employers understand the entire implications of their medical costs.
Once they decide who’s going to be eligible for their health care plans, they have to determine what those plans are going to look like from a design perspective and how they’re going to pay for them. Those are really two different things. On the design side, will they offer traditional PPO or HMO plans? Are they going to move some or all of their employees to high-deductible health plans, which could potentially lower costs? That could be a significant change for some employers for their employees. Are they going to encourage people to participate in wellness and health management programs? Will participation in those programs be a condition of an employee being a participant in the health care plan? There are all kinds of extremes along a continuum that employers need to think about.
From a funding perspective — and this is an area where we think there is a lot of opportunity for exploration — does the employer continue with a defined benefit program? Today, the majority of employers run their medical and dental programs as a defined benefit. This means that, each year, they look at the cost of the programs, the cost increase over the prior year, and then determine how much they will pay and how much they will ask employees to pay. What are the choices that they want to offer to their employees? What’s interesting about some of those conversations is that, for a very long time, employers generally offered a pre-set menu of two or three medical plan options for their entire workforce, which could be 55 people or 55,000. That’s very different from employers that are now saying, ‘Here’s some money and you have a very long list of choices. Chose what suits you, but I’ve made a decision as the employer as to what I’m going to pay for your benefits.’ Those conversations are beginning and I think we’ll hear more on the defined contribution front.
Mindy Fox: This was once called flexible benefits, but the new term is defined contribution. Sharon makes an important point. Employees had more choice with flex benefits, but in terms of defined contribution, employers are almost establishing a version of a shopping mall and providing their people with even greater choices and trade-offs.
What advice can you offer employers as they address these issues?
Mindy Fox: It’s very important to have a health care reform checkup. We made a decision as a consulting firm that we’re going to service all target markets from small to global to jumbo. What we’re finding is that this checkup is applicable to all client and market segments. You might think that the largest companies are set, locked and loaded. They’ve been looking at this for a very long time. However, the practical reality is that, given what’s known about health care reform, companies have got to take a refreshed look at their current state. While many companies have been going along the continuum to try and refine, modify, and manage their costs, there are some provisions that need to be addressed. Most large companies have part-time employees or temporary workers. Issues that they didn’t naturally think about in the context of managing their active employees on a year-over-year basis now have implications in terms of health care reform. It’s important for companies to look at their current state through a different lens than they have previously when designing a health care program for their active employees. They now have to consider those programs in the context of the health care reform provisions that they know can affect them.
Another area that we’ve recently added to the health reform checkup is looking at what employers are doing from a communications standpoint. Companies need to take stock of how they communicate information about their plans today. What are the specific requirements that they need to communicate? How much can they leverage the way in which they currently communicate with their employees to help them understand the concept of health care reform and drive more meaningful behavioral changes?
Sharon Cunninghis: Communications is a big issue. Many of the conversations that I’ve had with clients as well as at Mercer indicate that people want to know what’s happening. Are employers still going to provide health care for their employees and what’s it going to look like? It’s really important to start having those conversations now to help employees understand the impact of health care reform on the organization, what they can do to help, where they can take responsibility for their health, and how they can participate in wellness programs that many employers offer today. As employers begin to make decisions around strategies, which still might be a year or two away, they need to start preparing people. For example, an employer that plans to have a narrower provider network will want to start talking about that change a year or so beforehand so employees really understand why that change is being made. Or, if an employer is going to move to a consumer-driven plan with a health savings account, it would be helpful to start educating people about how they can save for retirement not only from an income perspective but to cover the cost of health care when they retire as well. Having that education in advance is helpful, so that when that option is finally offered to employees, it doesn’t look like a foreign object. Employees will be able to understand why it’s being offered and how they might use it.
This is a long-term journey of communication. It’s not the kind of thing that is communicated once and then it’s done. Employers need to plan a strategy around communications over a couple of years. Employers that do that well will be able to modify their strategies to suit their businesses, financial needs, and employees. Employees may not be happy about every change, but at least they’ll understand it. That’s what is going to lead to success.
Can you share any examples of companies that are doing this right?
Mindy Fox: I was talking to a client the other day and told them I was fascinated by the decision they made to offer health and wellness programs and consolidate their carriers. They’re a pretty conservative organization, and they looked at health care reform and leaped-frogged to a finish line that I simply didn’t expect. There is a very short list of things that have happened in our country that are as profound as health care reform. This is a top-of-mind issue for CEOs. The CEO’s point of view at this particular company was why wait to make these changes over a period of time? He thought making incremental changes would be disruptive to employees and impact productivity. Since the company ultimately believed that making changes to its health care program would affect productivity, improve employees’ health status, and help manage costs, then it should do it now. So that’s the decision that the CEO made.
As much as the head of HR and the CFO are important in these decisions, health care reform, probably more than other issue we’ve seen, has the attention of CEOs. This is an issue that is very much front and center with the c-suite. It’s not just about the cost of health care per se. It’s a critical issue in terms of determining a company’s longer-term strategy.