Data and Research March 23, 2015

CDHP Cost Saving Not Just a One-Time Event

A study suggests CDHPs do not just cut employers’ health care costs in the first year of use.
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Health care cost growth among firms offering a consumer-directed health plan (CDHP) is significantly lower in each of the first three years after offer, according to a research paper published by the National Bureau of Economic Research.

Using data from 13 million individuals in 54 large U.S. firms, the research results suggest that—at least at large employers—the impact of CDHPs persists and is not just a one-time reduction in spending. However, researchers did find the decrease in spending may be smaller in year three compared to year one post-offer. They say the results are suggestive and consistent with a decreasing impact of CDHPs over time.

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At the firm level, the researchers find that the CDHP offer is associated with an approximately 5% reduction in total health care spending in each of the three years after CDHPs were introduced relative to cost growth observed for non-offering employers.

The decreases in total spending growth observed were primarily due to reductions in spending on outpatient care and pharmaceuticals. In contrast, by the third year there were no differences in either emergency department or inpatient spending. The researchers note that it is more difficult to obtain pricing information that allows workers to ‘shop’ for emergency department or inpatient spending.

Looking at differing CDHP design features, the researchers’ estimates are consistent with the theory that CDHPs with larger financial incentives are associated with greater and more long-lasting reductions in spending than CDHPs with smaller financial incentives. However, they say further research is needed to determine which plan design structures are most beneficial.

The researchers note their results are limited to large employers and may not extend to the small group market. In addition, they note that the findings do not address the concern that short-term decreases in spending with a CDHP is, in part, a result of workers foregoing care and will result in increases in spending in the long term.

Information about ways to obtain the report, “Do ‘Consumer-Directed’ Health Plans Bend the Cost Curve Over Time?” is here.

Administration March 23, 2015

Multiemployer Plans Need Consistent Returns to Fully Rebound

Multiemployer plans have not fully rebounded from the 2008 financial crisis because returns have not kept pace with growth in liabilities, according to Milliman.
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The overall funding shortfall for all U.S. multiemployer plans increased by $5 billion for the year ending December 31, 2014, while the aggregate funded percentage decreased slightly, from 81% to 80%.

The Spring 2015 Milliman Multiemployer Pension Funding Study report says the key assumption is the discount rate used to measure liabilities, with each plan using its actuary’s assumed return on assets assumption. Assumed returns are generally between 6% and 8%, with a weighted average assumption for all plans of about 7.5%.

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Milliman notes that multiemployer plans were more than 85% funded prior to the 2008 financial crash, and the significant improvement in aggregate funded status since early 2009 reflects not only favorable investment returns but also contribution increases (including withdrawal liability collections) and benefit reductions enacted by plans as they responded to the financial crisis. However, there is a common misconception that plans should be back on their feet because the stock market has surpassed its levels from before the financial crisis. Milliman points out that liabilities have been growing at 7.5% per year on average, so market prices would need to be significantly higher today than they were prior to the financial crisis to have kept pace with liability growth.

The study finds 285 multiemployer plans are more than 100% funded as of December 31, 2014, with an aggregate surplus of about $6 billion. The $60 billion shortfall for the 201 multiemployer plans that are less than 65% funded, about 15% of all plans, accounts for more than half of the aggregate deficit for all multiemployer plans of $117 billion.

Only 7% of multiemployer plans with positive cash flow are in critical status, while 72% of multiemployer plans with a negative 9% or more cash flow are in critical status. Cash flows are defined to be contributions less benefit payments and expenses, as a percentage of the market value of assets. While cash flow tends to correlate with zone status, Milliman says it does see plans with positive cash flow that are not in the green zone and plans with negative cash flow that are in the green zone.

To quantify the level of asset performance that plans will need, Milliman calculated an illustrative “recovery return” for each plan, which approximates the constant rate of return needed over the next 10 years for a plan to reach 100% funding. More than half of all plans would still need to earn 8% or more over the next 10 years to reach 100% funding within that time frame, assuming no changes to current cash flows. For all plans in aggregate, returns of 9.05% per year are needed over the next 10 years to reach 100% funding. Even if a plan recovers to 100% funding, the assumed return (7.5% on average) is still needed to stay fully funded.

The Milliman Multiemployer Pension Funding Study – Spring 2015 report may be viewed here. 

 

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