Last month, our article summarized the “state of the market” for employee benefits in the restaurant sector. We warned that medical trend (the rate of increase in medical plans) would be increasing in 2022 and in 2023. Since that publication, there’s even more disturbing news: a recent Wall Street Journal article noted that due to the high cost of labor, hospitals are considering significant cost increases—even considering breaking current PPO contracts.
As a result, we want to drill down further into why restaurants most often must absorb the cost increases themselves and can’t share these with employees. Then we’ll review the best strategies for plan cost management.
According to Segal and Mercer Surveys, 2021 Medical trend was 7.3 percent and Rx trend was 8.4 percent. This drove an average rate increase of 9.6 percent for employers with between 50 and 500 lives. While the existing studies indicate similar trend rates for 2022 and 2023, as mentioned above, there is growing evidence that the general inflation rate will drive even higher than forecasted medical costs. Double digit rate increases for the next few years, coupled with increased labor and materials cost could mean difficult navigation for many operators.
Restaurants Can’t Increase Employee Premiums
In our last article in MRM, we noted that none of our restaurant groups raised employee medical premiums for the 2022 plan year. Given the demand for employees, they were concerned that a premium increase could drive off employees or applicants. Most employers in other sectors, when presented a significant medical plan cost increase, will pass along a portion of the increase to the employee by adjusting premiums. They may also adjust the plan benefits, for example increasing the employee copays or deductibles. Most restaurants, however, cannot use these cost shifting strategies; they offer a minimum value plan where the employee premiums and out-of-pocket limits are based on limits dictated by the Affordable Care Act (ACA). These limits increase much more slowly than the rate of plan costs.
In 2021, the maximum premium that an employer could charge for healthcare coverage was 9.83 percent of household income. For 2022, the percentage was lowered to 9.61 percent of household income. It is also becoming very difficult to design a plan that has a 60-percent actuarial value, and simultaneously does not exceed the maximum out-of-pocket limits. Combined, the affordability guideline keeps employee contributions flat, and the minimum coverage requirements do not permit cost shifting via plan design adjustments. The restauranteur who received a trend increase bore all the costs. Many operators simply accepted these cost increases for 2022 due to the ongoing labor shortage, and the compliance requirements never came up for discussion.
Potential ACA Modifications?
Several weeks ago, a proposal was offered by the White House to “expand” medical coverage. Currently, the ACA premium affordability guideline applies to the employee only coverage tier. The proposal floated changed the affordability guideline to apply to family coverage. The cost of family coverage is roughly four (4) times the cost of individual coverage. If restaurants were forced to provide “affordable” coverage at the family level, the cost increase would be significant. This proposal is in the “comments” phase, and it’s too early to tell if this proposal will be enacted.
Forecasting the 2023 Plan Year
Assuming there is some relief in the general labor market, most operators will begin to consider strategies to mitigate the ongoing medical plan cost increases. Since it seems that the minimum plan requirements will not become less strenuous, more creative solutions should be considered.
Strategies for Meaningful Cost Savings
As noted above, the typical plan changes available when the renewal is presented, i.e., change a deductible, or copay, may not be an option for a restaurant. Longer term savings opportunities will take a concerted effort, and these are areas for review:
- Self-insured versus fully insured: Plans with more than 150 employee participants are likely strong candidates for self-insurance; and those between 100 and150 employees may also find self-insurance attractive. Self-insurance is not for every employer, and the components must be properly constructed to generate savings and simultaneously, manage risks. The savings opportunity typically ranges between nine and 16 percent.
- Prescription drugs: This portion of overall plan cost is greater than 20 percent for most groups, and could approach 30 percent over the next five years; potentially exceeding the costs for inpatient hospital care. A self-insured group will want to ask for their Rx contract to understand the discounts on drugs, along with rebates on specialty drugs. Restauranteurs also need to understand their exposure if a plan participant has an ongoing high cost annual drug spend, e.g. $500,000, or if a participant requires a one-time $2 million Rx claim.
- Stop loss coverage: A self-insured plan will need protection from high-cost claims, i.e., stop loss insurance. Determining the right level of protection and precisely what the policy covers requires careful examination.
- Minimum essential coverage (MEC) plans: Not all restaurant employees see the need for an all-encompassing medical plan. Some are willing to purchase a plan that provides some access to medical care and prescriptions at a lower premium. A well-structured (MEC) provides this type of coverage, offering substantial savings for any benefits eligible participant, and can be offered to part-time employees as a tool to attract and retain employees.
- Concierge service: Groups with more than 750 employee participants are often finding concierge services to be effective in managing costs for high claimants in the plan.
- Reference based pricing: While strategy may have the greatest opportunity for significant cost savings, there are risks and the potential for employee dissatisfaction. Reference based pricing means that rather than using a PPO network that has contracts with hospitals and physicians, the plan simply pays a percentage of the Medicare reimbursement rate for all the services provided (a typical rate is 140 percent). Since there is no contract in force with the provider, and many providers charge 200 or 300 percent of Medicare through PPO contracts, the provider may decide to chase the employee for the differentials. Good programs will provide the legal support for the employees facing that situation.
Most of these ideas aren’t new, and we have shared details on each of these subjects in our previous pieces in MRM. These considerations however, can be the keys to managing medical plan costs for the employer. While there may be new ideas or tricks to save a dollar, the concepts and potential actions outlined in this and our prior articles are the major restaurant employers should consider examining to achieve long-term plan savings. If your goal is to truly manage your medical plan costs, we recommend you begin examining these components now.