SHRM: Employers’ Benefits Costs Have Risen 24% Since 2001
US employers’ cost to provide employee benefits increased 24 percent between 2001 and 2015, fueled largely by a doubling in health care benefit costs, a new study shows.
Rising health care costs have driven employers to shift how they allocate benefit dollars, and prompts the question whether they are delivering the benefits their employees want.
HR consultancy Willis Towers Watson reported in Shifts in Benefit Allocations Among U.S. Employers that from 2001 to 2015:
The total cost of employer-provided benefits—health care, retirement and post retirement medical—rose from 14.8 percent of pay to 18.3 percent of pay, a jump of 24 percent.
Health care costs for active employees more than doubled, rising from 5.7 percent to 11.5 percent of pay.
Retirement benefit costs, which include defined benefit (DB), defined contribution (DC) and postretirement medical plans (PRM), declined by 25 percent between 2001 and 2015, from 9.1 percent to 6.8 percent of pay.
Much of the reduction in retirement costs since 2001 can be attributed to the widespread shift by employers away from offering traditional DB pension plans, and typically replacing them with enhancements to their 401(k) or other DC plans, said John Bremen, managing director of human capital and benefits at Willis Towers Watson.
While DC plan costs increased by 1.6 percentage points between 2001 and 2015, this wasn’t enough to offset the 2.9 percentage point decline in DB benefit costs.
Vacation and other paid leave benefits are not included in the analysis, which draws on the firm’s database of retirement and health care programs at over 500 U.S. employers with at least 200 employees.
The ‘Value’ Challenge
“The rising cost of employee benefits remains a challenge as employers seek to get the most employee value from their pay and benefit programs,” Bremen said. “Beyond the overall increase, there has been a seismic shift that can be characterized as a tale of two benefit programs: health care benefits are eating up a larger portion of dollars while the amount spent on retirement programs is on the decline.”
While employers have responded to rising health care costs by adopting high-deductible health plans and shifting a greater share of plan premiums to employees, among other strategies, health benefit expenses are a continuing challenge—and one that doesn’t look likely to recede anytime soon. A small respite in the rate of escalation for medical costs may be coming to an end, another study revealed. Consultancy PwC projects that 2018 medical costs will increase 6.5 percent, up from the 6 percent rise employers saw this year and the first uptick in growth in three years.
From 2006 to 2007, annual medical costs saw an increase of 11.9 percent, a per-year figure that has declined steadily except for a small tick up from 6.5 percent in 2014 to 6.8 percent in 2015.
“Businesses will have to tackle the price of services as well as the rate of utilization to reduce the medical cost trend in the future,” the PwC analysis noted.
Employees’ Cost Burden Rises
Meanwhile, many employees appear to have reached the limit of how much they are willing or able to pay for health care benefits, are worried about their current and future financial situations, and fear they won’t have saved enough for retirement and will have to work past normal retirement age, said Alexa Nerdrum, senior retirement consultant at Willis Towers Watson.
“Employers need to balance cost with the long-term returns on providing benefit packages that will be highly valued by their workers,” she said.
With the shift from DB to DC plans well established, employers may want to reevaluate the allocation of benefit dollars to better respond to employees’ needs and concerns,” she noted.
Nerdrum suggested that this could involve broader use of health savings accounts and providing employees with training and tools to promote wiser health care spending.
More evidence of employees struggling with higher health plan costs is provided in a June survey, with responses from 573 employer-sponsored health plan participants, by Securian Financial Group, a St. Paul, Minn.-based provider of group insurance products. The survey found that:
- Nearly 4 in 10 workers on employer-sponsored health plans are personally experiencing or know someone who is having financial difficulty due to medical bills.
- More than half (52 percent) of Millennials on a health plan through their employer are personally struggling or know someone who is struggling to pay medical bills.
- Among low-income Americans (household income of $35,000 or less) with health insurance through work, 55 percent report knowing someone or personally having financial difficulty due to medical bills.
“The rising cost of health care has driven many employers to offer supplemental group insurance products, often in conjunction with a health savings account,” said Elias Vogen, a director with Securian. “This combination can be cost-effective for both employer and employee.”
Help from Brokers
In a recent survey, 83 percent of health insurance brokers said that employers lean on them to control health care costs, while 78 percent said they have added new products and services in the past year to help their employer customers control health care costs, such as tools and resources that promote employee engagement by providing price transparency for health provider services.
These services encourage employees to become more informed health benefits “shoppers” and therefore select plans and procedures that get them the care they need, without paying extra, unnecessary costs, saving money for employees and their employers, said Bart Yancey, CEO of Birmingham, Ala.-based DirectPath, an employee engagement and health care compliance firm, which sponsored the survey of more than 120 brokers.
Broker services also help plan sponsors to more efficiently produce benefits documents and reduce their risk of noncompliance penalties, he noted.
“Brokers have a huge opportunity to be the strategic partner for helping employers keep costs down, engage employees on their benefits and maintain compliance to shifting regulations,” Yancey said.
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(Stephen Miller, CEBS, is the Online Manager/Editor, Compensation & Benefits at SHRM)