Contrary to fears that recent health care legislation will trigger a rapid decline in employer-sponsored health coverage in the U.S., management consulting firm Booz & Company published new research that shows employer-sponsored plans will decline more slowly and less steeply than commonly thought. In fact, by 2016, when most of the major reform provisions are expected to be implemented, employer-sponsored insurance will still comprise more than 50% of the insured market, with 152 million members enrolled in group plans, compared with 62% of the market and 160 million enrolled today. However, the report also indicates that insurers need to prepare for fundamental changes in their business models in the foreseeable future and anticipates a shift toward new, more narrowly targeted health plans with specialized capabilities.

The Booz & Company research indicates that only a small portion of employers will drop coverage or switch employees into employer-paid exchange plans that will be offered by local governments, as employers take a slow and cautious approach to coverage changes. “For the most part, the response of employers to reform will be guided by cost, along with the potential risk to their reputation, and their ability to attract and retain talent,” said Gary Ahlquist, Booz & Company Senior Partner.

The study conclusions are based on extensive research covering employers across different sizes, industries, and regions. To understand evolving healthcare needs and how employers are likely to respond to the new legislation, Booz & Company interviewed more than 150 employers, associations, and policy experts, and conducted employer focus groups and surveys to gather additional input from nearly 300 small and large employers. The firm also conducted a detailed analysis of health care plans in Massachusetts and Utah, where reform efforts resemble the federal health reform legislation. The research was used in a simulation analysis to project and evaluate various post-reform scenarios.

Key findings from the report:

- Health care reform will lead to a larger overall market for health insurance. Nearly 25 million uninsured will obtain coverage after 2016. Nearly 60% of those will enter an expanded Medicaid program, about 28% will get individual insurance through exchanges, and the remaining 12% will enroll in existing employer group plans.

- Of those currently enrolled in employer-sponsored health plans, Booz & Company analysis projects that five to seven million individuals will exit that market by 2016: employers will discontinue health benefits for three to four million, and an additional two to three million will be switched into employer-paid exchanges.

- Large employers are unlikely to drop their current health coverage for employees, instead adopting a conservative approach to long term change. Moreover, “our analysis suggests that there is not enough of a cost-value differential to offset the risks to employee morale and retention. Those companies that would save money by dropping their current plans believe that the savings may not be worth the potential downside,” said Sanjay Saxena, MD, Booz & Company Principal.

- The majority of mid-sized employers are also unlikely to drop current coverage, but some fully-insured groups may switch to self-funded products, where employers assume direct risk for paying healthcare claims. The shift would primarily be driven by costly reform provisions that are likely to by passed on by insurers as higher rates. However, some significantly cash-strapped firms could drop coverage if insurance premiums continue to rise and become unaffordable.

- Smaller firms, especially micro-businesses with fewer than 10 employees, are most likely to drop coverage and direct employees to purchase through exchanges. But change will be slow even among this group, as employers closely evaluate their options.

Implications for Health Insurers

While the traditional employer group business will remain viable for health insurers for some time, the analysis showed that health plans will experience a gradual but steady erosion of their fully insured group business, as exchanges create a retail environment in which customers shop for healthcare plans in the same way that they currently shop for life insurance. “It is imperative now that health plans carefully manage their group business to ensure that it generates sufficient margins and free cash flow. Plans must re-invest in the new capabilities they will need to compete in the post-reform era,” said Booz & Company Principal Paolo Borromeo.

Looking ahead, Booz & Company sees the emergence of health plans with specialized capabilities to target specific customer segments – a change from the traditional model of maintaining a presence across a broader range of segments. The report identifies four different business models emerging for health plans in the future:

1. Low cost standard plans, which will differentiate on retail marketing, network management, and price;

2. Custom, higher cost plans, aimed at mid-sized and large group segments, with more complex administrative capabilities and customization of benefits;

3. Medical value health plans that incorporate new care delivery, payment, and consumer engagement approaches to address the central issue of improved quality and lower total cost of care;

4. Broader health service companies, which will follow a retail-like approach to offering a range of products and services to capture a greater share of spending from the core customer base.