In response to unabated health care cost inflation and the health care reform law, employers are making “bold” benefit plan design changes to keep costs in check, according to the “16th Annual Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care.”

Employers expect average costs for employee health care benefits to increase 7% in 2011, up from an increase of 6% in 2010, the survey found. Although the increases have stabilized during the past few years, they continue to outpace inflation and are projected to reach $11,176 per employee in 2011.

The Patient Protection and Affordable Care Act likely will exacerbate that cost trend, according to the survey released Thursday at the NBGH's annual “Business Health Agenda” meeting in Washington.

Eighty-one percent of employers reported that PPACA has increased the administrative burden on their human resource departments. Moreover, 80% of employers expect the excise tax on the highest value plans will have at least some impact on the cost of their plans if no substantive design changes are made. Under PPACA, a 40% nondeductible tax, known as the Cadillac tax, will be levied on the annual value of health plan costs for employees that exceed $10,200 for single coverage or $27,500 for family coverage beginning in 2018.

To curb health benefit costs, employers are turning to consumer-driven health plans that combine high deductibles with either a health reimbursement arrangement or a health savings account, the survey found. CDHPs cost $730 less on average than health maintenance organizations for employee-only coverage, and $2,118 less for family coverage, while preferred provider plans cost about $200 more on average than a typical HMO for single coverage and $750 more for HMO family coverage.

Although 53% of employers already had CDHPs in place in 2011, roughly the same percentage as last year, 27% plan to begin offering CDHPs in 2012, according to the survey. In 2002, just 2% of all employers offered CDHPs.

Employers also are trying to improve CDHP takeup rates by offering employees significant reductions in premium contributions. In 2011, 56% of employers set their employees' CDHP premium contributions at least 20% lower than contributions for their traditional plan, and 26% of employers more than halved employee contributions compared with other plan types.

Employers that added 10% or more employees to their CDHP enrollment in 2010 vs. 2009 held their health care costs nearly flat, while companies that drove greater CDHP adoption rates reduced their costs by nearly $1,000 per employee, the Towers Watson/NBGH research found.

“We cannot continue to think that the rise in health care costs is sustainable. Health care costs have experienced dramatic cost inflation over the past two decades, and employers continue to subsidize the majority of plan costs,” said NBGH President Helen Darling said in a statement. “But these costs are cutting into employers' profitability, and the total rewards they are able to offer employees, plus concerns about the future Cadillac tax add a new level of urgency to their challenges.”

The Towers Watson/NBGH survey, which is conducted annually, also identified a more than twofold increase in the use of outcomes-based financial incentives as another cost-management strategy used by employers. Such incentives are paid based on achievement of certain biometric outcomes, such as targeted weight control or cholesterol levels. Employee health habits are the top health care cost challenge facing employers, cited by 66% of the 588 employers responding to the survey.

While only 6% of employers offered outcome-based financial incentives in 2010, an additional 7% introduced such programs this year and 33% plan to add outcomes-based incentives next year, the survey found.

“One of the critical changes we're seeing is the movement away from engagement and participation to outcomes-based incentives,” , said Julie Stone, a senior consultant at Towers Watson, based in Parsippany, N.J. “That's an important part of the message we're getting from the research. Employers are saying they need evidence that an employee has quit smoking, or that they've enrolled in an exercise program,” before they will pay them an incentive.

She added that the PPACA provision that allows employers to pay an incentive valued at up to 30% of the cost of single coverage will provide even greater opportunity to employers to use financial incentives as a way to manage health care costs.

Among other survey findings:

• Some 70% of employers expect the opening of the insurance exchanges in 2014 will have affect their active employee medical plans, while 78% expect the exchanges will affect their retiree medical plans. In particular, employers are concerned that employees will enroll their dependents in exchange plans if the cost of employer-sponsored dependent coverage becomes too expensive. Similar shifts are likely for retiree populations.

• Twenty-six percent of employers plan to cease employer sponsorship of retiree medical coverage, 25% plan to convert a subsidy to a retiree health account, and 23% plan to eliminate employer-managed drug coverage for post-65 retirees and rely on Medicare Part D plans. Forty-eight percent of employers offer subsidized retiree medical coverage to pre-65 retirees, down from 50% in 2010, while 44% offer some coverage to Medicare-eligible retirees, down from 47% in 2010.

• Sixty-eight percent of employers are moving to increase contributions for dependents, with 19% targeting per-dependent contributions and 35% using or planning to implement spousal waivers or surcharges.

• Twenty-eight percent of employers plan to differentiate cost sharing for high-performance networks or centers of excellence in 2012; 21% plan to adopt value-based benefit plan designs during the next year; and 18% plan to offer incentives or penalties to providers for coordination of care, use of emerging technologies or use of evidence-based treatments.

The complete survey, conducted late last year and early this year, is available online at www.towerswatson.com/research/3946.