For employers, the magic number is 6%

If you ever meet Tracy Watts, a consultant in Mercer’s Washington, D.C., office, ask her to read your palm or pick your lottery numbers.

In a Daily Diversion post nearly four months ago, Watts said that, "average health benefit cost per employee has been rising consistently at about 6% for the past five years. That seems to be employers’ threshold of pain. If compliance with health insurance reform pushes the cost increase up toward double digits, employers will be exploring ways to bring it back within their comfort zone.”

So, what makes Watts’ prediction so prescient?

A new Mercer survey of nearly 1,100 employers asked about the cost impact of meeting the Patient Protection and Affordable Care Act requirements for 2011 — specifically, extending dependent eligibility to age 26 and removing annual and lifetime benefit maximums.

Employers estimated that making the changes would add 2.3%, on average, to their 2011 cost. They predicted their cost would rise by a total of 10.1%, if they made no cost-saving changes.

But when asked for the increase they hope to achieve after making cost-cutting changes — switching plan vendors, raising deductibles and other cost-sharing provisions, or offering a different type of plan — employers say they aim to hold the cost increase to 5.9%.

Nice work, Watts.

Her prediction holds true for smaller employers as well — those with fewer than 500 employees — who generally offer fully insured plans and predicted an underlying cost increase of nearly 12%, but also expect to bring their cost increase down to 6%.

How are employers planning to stay within that 6% comfort zone? Overall, 57% of respondents will ask employees to pay a greater share of the cost of coverage in 2011.

Over half of these will increase the cost of dependent coverage proportionally more than the cost of employee-only coverage, mostly to counter extending coverage to dependents up to age 26.

In addition, employers will be looking to reduce health care cost increases by improving workforce health: 44% of respondents say they will add health management or wellness programs or services in 2011, and 38% say they will add incentives for employees to participate in the health management programs already available to them.

Lastly, Mercer finds that relinquishing grandfathered status may actually be a cost-saver for some employers.

Among respondents, 53% think all their plans will retain grandfathered status. About a third (32%) expect to lose grandfathered status for all plans, while 15% expect to lose it for at least one plan, but not all. Of the survey respondents that expect to have a grandfathered plan in 2011, about half believe they will have to forgo grandfathered status before 2014.

You’d think this would have employers worried, but Mercer’s findings reflect an “Eh, no big deal,” vibe. According to the survey, 63% say that the cost avoidance from plan design and contribution changes will be greater than the additional costs resulting from the loss of grandfathered status, and 26% say that complying with the rules for non-grandfathered plans will not be onerous.

Well, excuuuuuse me.

What do you think? Is 6% your tipping point for cost increases? Is losing grandfathered status worth maintaining that magical number? Share your thoughts in the comments.