In the Face of Complexity

09/08/2015 08:53 am ET Updated Sep 07, 2016

SME Competitiveness and Healthcare Reform

The central tenant of the insurance industry is that the law of large numbers drives down the average price of risk. This principle of diversification has broadly withstood the test of time in an industry that has weathered man-made and natural calamities over many centuries. Despite the resilience of the global insurance industry and its ability to equip customers with the capacity to cope with uncertainty, healthcare continues to be the domain where the industry broadly falls short. With a raft of changes afoot due to the adoption of the Patient Protection and Affordable Care Act (PPACA), combined with mega-mergers in the U.S. health insurance market, employers of all sizes can thank complexity for eroding their benefits plans while inflating operating costs.

Like most periods of market turmoil, small and mid-sized firms are particularly vulnerable. One of the risks they face is a flight of talent to upmarket jobs that can provide better benefit plans or reduced employer-employee cost sharing percentages. Small employers are also disproportionately shouldering medical price inflation. Directionally that the U.S. is entering a period of broad healthcare price inflation is counterintuitive, especially since healthcare reform brings millions of historically under-insured and uninsured groups into the risk pool. Similarly, the wave of health insurer consolidation creates greater economies of scale, which when combined with advances in healthcare should help keep premium inflation in check. Instead forecasters such as Wells Fargo Insurance Services is projecting average medical insurance price inflation in 2016 to range from 8.6% to 10.1% depending on plan selection. Premium inflation continues to outpace expected wage increases in 2016, which SHRM estimates will average 3.1% across major employee categories.

One small business owner in the talent management and search industries opined that they were expecting a 40% price increase for their medical insurance in 2016. The justification given for this exorbitant rate hike is that their average age skewed high and healthcare reform has saddled the industry with losses due to adverse selection. Any business owner facing such a high price increase for one of their largest operating costs will clearly have to make some stark choices. Not seeing an offset in revenue growth, left unchecked healthcare price inflation will begin to erode business confidence nationwide. Hiring freezes and reductions in force are possible in anticipation of regulatory changes and hefty price hikes. Similarly, healthcare reform is having the unintended consequence of changing the nature of employment altogether. Many firms are gaming the system by changing the employment status of their staff, opting for seasonal and part time workers to lower the number of full time equivalents (FTEs) on their payroll. Many firms, with Burger King being a recent example, are relocating their headquarters and moving functions offshore or near-shore. Additionally, the dueling forces of reducing benefits while increasing the share of premiums borne by employees are moving in opposite directions - with downward pressure on the levels of coverage and upward pressure on risk-sharing. Only in healthcare are customers to be satisfied with paying more for less.

Left unchecked healthcare complexity and the attendant costs will begin to spill over affecting broader business confidence potentially stalling the U.S. job engine - namely, small to mid-sized companies, which account for 64% of net new jobs, according to the SBA. Additionally, there is a risk that companies will continue to hang on to their scarcest resource after talent - cash - limiting the amount of capital investments they make. Underscoring the scope of the challenge, The Baltimore Sun recently reported that the state's CareFirst BlueCross BlueShield filed for rate increases up to 26% with Maryland's insurance commissioner for 2016. Sadly for employers and individual consumers these rate increases were approved by the insurance commissioner and the impact will weigh heavily on the least prepared households and businesses. Maryland's CareFirst accounts for 94% of the state's individual healthcare market and 66% of the small business market according to the The Baltimore Sun.

In order to weather this storm, employers need to take a hard view on the total cost of employee benefits, understanding the direct and indirect cost drivers. This task can be more readily completed by larger firms with a deeper financial, insurance and HR bench. However, small to mid-sized firms have a greater level of urgency to contain costs and combat complexity through a holistic approach. If there ever was a time to break the annual "take it or leave it" policy renewal ritual it is now. Small to mid-sized employers need to take an activist view on their entire employee benefits offering. Clearly reducing coverage will have the adverse effect of alienating talent, potentially triggering their flight to greener pastures. At the same time, passively accepting profit-eroding price increases in the name of complexity is not an option. History may yet cast a favorable vote on healthcare reform, which has lowered the bar of access and improved many areas of coverage. In the short run, however, the industry is moving towards high costs and opacity in an already troubled market. Employers of all sizes would be wise to lean on their insurance providers and brokers to help navigate through the storm.