Benefits September 18, 2017

Employers Bracing for Increase in Health Benefits Costs for 2018

Employers are looking at various cost-controlling strategies such as partnering with Centers of Excellence and offering telemedicine services.

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Employers expect health care benefits costs to rise by 4.3% in 2018, marking the highest increase since 2011 when costs rose by 6.1%, according to a study by Mercer.

The global consultant says the spike is being fueled by the rising costs of pharmaceuticals, which will increase more than 7% next year as spending on new specialty medications skyrockets. Respondents to Mercer’s survey reported that spending on specialty drugs rose by about 15% at their last renewal.

In response, many employers say they plan to raise deductibles and switch carriers. But they are also exploring alternatives that can keep costs down without pushing a large burden onto employees.

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For example, employers are looking toward network strategies such as Accountable Care Organizations and Centers of Excellence. In addition, several employers are trying to keep employees healthy and as far away from the hospital as possible through wellness programs that incentivize employees to make healthier life choices. Other studies have also indicated rising use of Health Savings Accounts, which allow employees to save for current and future medical costs through tax-preferred investing.

Mercer notes employers are also “moving away from traditional fee-for-service provider reimbursement toward new payment models that reflect the value of the services provided rather than just the quantity.”

“There are ‘real world’ examples of how these strategies can work,” Tracy Watts, senior partner and Mercer’s leader for health reform. “For example, Mercer Health Advantage, an enhanced care coordination and support service for employees with very serious health issues, greatly improves the patient experience while saving an average of $3.30 for every dollar spent.”

The global consultant notes that cost-reducing strategies will be crucial in light of the impending “Cadillac Tax.” Because Congress was unable to adopt a new health care bill, the Affordable Care Act stands and the excise tax is slated to go in effect in 2020 unless the ACA can be repealed and replaced.

Watts says “The excise tax creates pressure to generate immediate cost savings though cost-shifting or other short-term fixes. But employers are also making good progress with longer-term strategies that address the root causes of high cost and cost growth.”

She adds, “Employers find the challenge of juggling cost-management objectives and affordability issues for employees gets harder every year. Consumerism has a role in addressing rising costs, but there are many factors that drive costs, separate and distinct from relative generosity of the plan design.”

These findings are taken from preliminary responses to the National Survey of Employer-Sponsored Health Plans 2017 by Mercer. More information can be found at Mercer U.S.

Investing September 18, 2017

TDFs Outperformed Typical DC Investor Since 2006

The Callan DC Index also shows nearly three-fourths of DC plan account balance growth has been due to investment performance.

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The Callan DC Index returned “a healthy 3.06%” during the second quarter, reflecting strong equity market performance among defined contribution (DC) plan investors.

“Combined with impressive first-quarter gains, the Index is now up 7.87% year-to-date—its strongest first-half performance since its 2006 inception,” Callan reports. This strong performance is appreciably higher than predictions made widely by firms in the last year or two, as return forecasts for the next decade were trimmed to the low- to mid-single digits.

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Somewhat troubling, the index actually trailed the typical age 45 target-date fund (TDF), which gained 3.65% in the second quarter and 9.42% in the first half of the year.

“These are the TDFs that would be selected by participants age 45 and retiring at age 65—or the typical DC participant,” Callan notes. For context, the firm reports TDFs have benefited from higher exposures to non-U.S. equity and emerging markets relative to real investors; both investing categories are up sharply year to date.

“The typical DC participant has less than 1% in emerging market equity exposure and less than 6% in non-U.S. equity exposure,” Callan says. “In comparison, the typical Age 45 TDF has 5.2% in emerging markets and 20.1% in non-U.S. equity. Exposure to stocks is greater in TDFs as well, with the equity allocation of the typical Age 45 TDF coming in at 76%, compared to the typical DC participant’s 70%.”

Callan researchers explain the average TDF has outperformed DC plan investors by 76 basis points annually since they first started measuring in 2006. As a rule of thumb, due to their overall heavier equity exposure, “TDFs have tended to outperform in strong markets, and underperform in weak markets.”

Also important to note about the performance history of the index, the last quarter’s increase was almost entirely due to return growth (3.06%) rather than inflows (plan sponsor and participant contributions), which contributed just 0.13%. “Since inception, the average plan balance has grown by an impressive 7.96% on an annualized basis,” Callan says, “and nearly three-fourths of this (5.88%) is due to market performance; the rest (2.08%) is driven by inflows.”

Callan further observes how the proportion of net flows into non-U.S. equities during the quarter was the highest since late 2007. “This is not surprising as DC investors tend to chase performance,” researchers suggest. “Money primarily flowed out of stable value, U.S. small/mid cap equity, and company stock. As usual, TDFs attracted the lion’s share of net flows, with 69 cents of every dollar of flows moving into these funds. Over the Index’s history, an average of more than 50% of net flows have been directed to TDFs. These consistent inflows have solidified TDFs as the largest holding in the typical DC plan.”

The quarterly analysis also states that investor turnover reached only about two-thirds of its normal rate during the quarter under consideration, while the DC index’s overall equity allocation edged up from last quarter to nearly 70%. This is slightly above the Index’s historical average of 67%.

The full index update is available here. 

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