Navigating the coming changes in the commercial group market

Articles

While recent attention has focused on public exchanges, the commercial group market will be a hotbed of change over the next five years. Unmanaged, the segment faces profitability pressure, but payors who take proactive measures to redesign their health benefits product portfolio and optimize their pricing approaches will find revenue and earnings growth.

Employers face an unsustainable healthcare cost burden. And, while the traditionally high annual rate of increase has moderated somewhat in the last few years, it continues to outpace inflation. This cost burden has led to discussions of whether the nature of employer-sponsored health benefits should fundamentally change.1 Healthcare reform has intensified these discussions.

But how ready are employers to make major changes to their healthcare benefits? To better understand this issue, we conducted numerous interviews with, and two surveys of, executives at mid- and large-sized companies over the past two years. Our results, similar to reports from other leading organizations,2 confirm that many executives are considering this issue. Many of them expressed their belief that new insurance options, such as defined-contribution models and private exchanges, hold promise for ameliorating rising healthcare costs, as would the elimination of coverage for some beneficiaries (e.g., part-time employees, Medicare-eligible employees, and spouses). Several employers, including Walgreens, Sears, and Darden, have already moved, or have announced that they will be moving, their active employees to defined-contribution private exchanges. An even greater number of companies (e.g., Caterpillar, IBM, and Time Warner) have transferred, or have announced that they will be transferring, retirees to private exchanges. Based on our analysis of the relative likelihood of a move to defined-contribution private exchanges by industry, we estimate that roughly 20 million to 30 million people will likely shift from traditional group coverage to private exchanges by 2019.3

However, our research also suggests that most employers are not yet ready to make major changes to their benefit models. Even if up to 30 million people are shifted to private exchanges, approximately 110 million to 120 million people will remain covered by traditional employer-sponsored health benefits.

The majority of the executives we interviewed or surveyed agreed that their company’s near-term goal is to be “slightly above the industry average in benefit offerings.” Many of them also expressed concerns about implementing major changes unless their competitors for talent take similar action, fearing that such a move could harm talent acquisition and retention. For the next one or two years at least, most of the executives said, they plan to continue offering health insurance benefits similar to those they provide today, while working to optimize employee satisfaction and reduce costs within the boundaries of their existing benefit models. In addition, they will monitor what their competitors for talent do before making any big moves themselves (Exhibit 1). For at least the next several years, then, commercial group insurance will most likely continue to be the largest segment in the health insurance market (Exhibit 2). Today, group insurance accounts for about 58 percent of all insured lives in that market. Although group plans will not significantly benefit from the accelerated growth expected to be fueled by healthcare reform, our analyses suggest that the number of people covered under group plans (including those on private exchanges) is not apt to change significantly between now and 2019.

In this article, we will discuss how the economics and trends of the commercial group market are likely to change between now and 2019—and what the implications and opportunities are for payors.

Many employees are waiting for others to make the first move on major benefit changes

The commercial group market will continue to be important in the future

  1. Kaiser Family Foundation and Health Research Educational Trust, Employer Health Benefits 2013 Annual Survey; Christopher S. Girod, Lorraine W. Mayne, and Scott A. Weltz, Milliman Medical Index, May 22, 2013; “Aon Hewitt analysis shows lowest U.S. health care cost increases in more than a decade” (news release), October 17, 2013.
  2. Examples of these reports include the 2013 Towers Watson/ National Business Group on Health Survey, Reshaping Health Care: Best Performers Are Leading the Way; the 2013 Accenture Research Report, Are You Ready? Private Health Insurance Exchanges Are Looming.
  3. McKinsey analysis based on MPACT and Bureau of Labor Statistics, 2013. A forthcoming white paper on private exchanges will provide more details about this shift.