On May 27th, 2014 an article appeared in the Wall Street Journal titled “New Costs From Health Law Snarl Union Contract Talks”. This article provides an interesting insight into the challenges both employers and Unions face under the Affordable Healthcare Act as they try to determine the future cost of health plans that have been in place for decades in many cases. Putting a specific financial value on the cost of a health plan for a period of 3 to 5 years, particularly a known plan covering a known group, should be a relatively routine task. However, under our current insurance/ASO structures, there is no way to lock in such a cost over a multi-year period. Either the employer is at risk if actual costs exceed the projections, or the union must accept a very high risk charge to cover the worst case cost of the health plan. Regardless of how the issue is resolved, the situation is a lose-lose environment for both parties.
This is a situation for which the S&P Healthcare Claims Indices can be utilized. With the introduction of the S&P Healthcare Claims Indices both employers and labor now have a common measure of the average market rate of healthcare cost changes (trend) for any time period. By utilizing the indices, the two parties can now take advantage of several options to structure solutions to resolve the problem. Consider a couple of relatively simple examples:
- The employer and union could agree that the contract will use the index as a neutral measure of market cost changes. By comparing the plan’s financial trend to the market’s trend (in essence “marking to market”) both the employer and the union have a shared goal of improving the plan’s financial results. If the plan’s actual trend was lower than the S&P trend for the same period (meaning that the plan’s financial performance was better than the market average measured by the index) then the plan would have a surplus which could be used to reduce future contributions from the union employees. Likewise, if the plan’s actual trend was higher than the index, then the employee contributions might be increased to cover the shortfall. Under this approach, both parties have an incentive to manage the cost of the health plans as carefully as possible – an incentive that typically does not exist currently.
- An employer could use the S&P Healthcare Claims Indices as the basis to negotiate a financial contract with a third party, such as an insurance carrier, reinsurer or bank, that limits the employer’s liability for healthcare costs in excess of a set trend over the period of union contract. In effect, the employer has entered into a futures contract for healthcare costs. The contract would function as a hedge, in much the same manner as a futures contract is used to hedge commodity costs, or investment performance. The result is that both the employer and the union could determine the cost of health care benefits under the union contract with a high level of confidence. Both the union and the employer would understand the value of the healthcare program – and they could then decide whether to make changes to the plan provisions in order to change that cost.
Futures contracts are a well understood mechanism and have demonstrated their value across any number of markets. Is their utilization as to hedge against future health care costs just the next step in this financial structure’s evolution? The index linked approach would also work much the same way as reinsurance or catastrophic insurance in other insurance markets, with the indices being used as the final settlement value to the cost guarantee.