Rx for high health insurance costs
Purchasing groups and flexible spending accounts are some of the ways to tackle rising health insurance costs
By Phillip M. Perry -- Industrial Distribution, 11/1/1999
ARE HEALTH INSURANCE COSTS MAKING YOU SICK? If you get a migraine just thinking about the answer, you are not alone. Businesses large and small are getting hit with their steepest premium hikes in a decade."Rates are coming back up with a vengeance," says Niels Heemskerk, vice president of insurance services for the Illinois Manufacturers Assn., whose member businesses have 10,000 employees. "The whole cost of medical care has gone up so drastically that it's catching people by surprise."
Health insurance rates are rising as much as 15 percent for many employers this year, according to Larry Boress, executive director of the Chicago Business Group on Health, a consortium of 80 employers. "That's quite a change from recent times when we were able to hold the line."
Smaller employers are being clobbered the worst because they lack bargaining clout with insurance companies. Businesses with fewer than 50 employees are reporting price hikes averaging 13 percent, with some as drastic as 22 percent, according to a recent Dun & Bradstreet survey. Larger businesses are getting hit with six percent hikes on average; most expect that figure to rise.
The big medical bills are part of a longer-term epidemic. If you are a typical employer, your health costs are more than twice what they were in 1982. They are expected to double again by the year 2007. Already, some employers have pulled health insurance from the pool of employee perks.
It all seems like a morning-after headache for employers still groggy from a five-year party when annual premium increases simmered at less than three percent. The party pooper? Managed care -- that controversial but effective antidote to the high health care costs of the late 1980's --has pretty much exhausted its ability to control medical expenses. Some 85 percent of employees covered by health insurance already belong to HMO's or a related form of managed care, according to the Health Care Financing Administration in Washington, DC.
Today, as the costs of more sophisticated medical techniques and drugs spiral upward, companies must rely on equally advanced cures for health insurance distress. What follows are some tips to help reduce the toll on your bottom line.
Join a purchasing group
"When you join forces with other employers you bring more leverage to the negotiating table," says Boress, who points to his Chicago association's success as reflective of employer groups elsewhere. "We held down our rates to four percent or less for 1999 and negotiated performance guarantees and reporting procedures."
Employer groups around the country are enjoying an unexpected benefit: the ability to offer more choice to employees. One example is the Illinois Manufacturers Assn., which has signed with two HMO's. "HMO's give the most bang for the buck, but they have one big drawback," says Heemskerk. "Since you only have one physician network to get those savings, employees react against the fact that they often have to change their doctors."
Employees in the IMA region live in an area with a 60 mile radius, so picking just one HMO is difficult. "Picking multiple HMO's is the answer," says Heemskerk. "Our two HMO offerings together have 70 percent of the available physicians, so the likelihood that an individual's favorite physician is in the pool is fairly high."
Setting up a multiple choice program can be difficult and requires expertise. That's why the IMA utilized the services of The Institute for Health Policy Solutions, a Washington D.C. consulting firm that assists employer groups in designing health insurance strategies. "This helped us cut our development time in areas such as plan design, contractual language, picking the right administrator, and setting of rates," says Heemskerk.
"Smaller employers working alone are really forced to select a single health care plan off the rack, on terms other than their own," says Kevin Haugh, principal of The Institute for Health Policy Solutions. That's because an insurance carrier, to protect its risk, will insist on being the sole provider of insurance for a small group.
"That puts the smaller employers in a difficult position," says Haugh. "If it offers a low-cost managed care plan, some employees are bound to be upset because their favorite doctors are eliminated. If it offers a higher cost open-ended plan, employees will be upset at the cost."
This conundrum is solved, says Haugh, when employers join forces. Because of the higher number of employees involved -- and the existence of an administrative staff that has the time to negotiate terms -- the employer group can land deals with more than one insurance carrier. That means employees of even the smallest businesses have a choice of health plans.
And the ability to choose plans -- and thus doctors -- is a big priority for most individuals. Part of the reason for escalating health costs is a migration by many employees toward the more expensive Preferred Provider Organizations (PPOs), a kind of plan that often offers more physician choice as well as faster access. An employer group, however, can offer employees the choice of a number of the cheaper HMO's, one of which is bound to include each employee's favorite doctors.
"The employer can offer three or four managed care plans, all of which have lower premiums than a PPO," says Haugh. "You save the employer money and you offer employees more choice. So it's a win-win situation."
It sounds great, but watch out for groups that are either financially weak or downright fraudulent. Employers have been burned by joining groups that grabbed the premiums and stole off into the night or went bankrupt. Employers and personnel were left high and dry.
Many of these tragic cases occurred in the late 1980's when premium hikes topped 18 percent and many a panicked employer saw a fly-by-night group as a quick fix. With premiums now roaring back with a vengeance, experts look for the fraudulent group epidemic to recur.
The bottom line: know with whom you deal. "Determine whether the entity is in fact a licensed health insurance plan," suggests Haugh. "What company is bearing the risk? That is the first question." Then determine the legitimacy of the intermediary -- that's the organization that actually administers the plan, taking care of such mundane details as collecting the premiums and shuffling the paperwork. You want to make sure this organization doesn't abscond with your premiums. "Ask your state insurance department for information on the entity," says Haugh. "Check with the better business bureaus. Ask for proof of a license to operate in your state ... See what history you can get on this organization."
Also, avoid switching plans every year to get better premiums. The paperwork from holdover claims can overwhelm you, and sooner or later you may get burned when no carrier will take your business.
Shift costs to employees
You can get better deals from insurance companies by shifting more health care costs to employees. Cost shifting occurs when employees make greater co-payments, or pay higher annual deductibles, for services received. In such cases you will enjoy lower premiums because the insurance company is funding less of the total annual health care expense. Yet another advantage is that employees who shoulder more of the costs for their decisions will be more prudent health insurance consumers. That translates into lower risk for the carrier and thus lower premiums for the employer. Many employers have replaced the traditional $5 office visit copay with $10 or $15.
More employers are passing along the cost of drugs to employees, as well. "Prescription drug plans have seen the largest increase in costs of any component of health care," says Vincent Gandolfo, senior managing director of Frank Crystal & Co., a national insurance brokerage firm based in New York. "They are currently increasing at the rate of 15-18 percent a year." The days of $5 to $10 copays for drugs are long gone; a $20 copay is rapidly becoming more typical.
"Cost shifting works quickly to reduce your expenses," says Tim Harrington, a principal with Boston-based William M. Mercer, Inc., an actuarial consulting firm. "And you often save more than you impose on your employees."
Harrington offers this example: "Suppose your current policy does not have a copay, and you replace it with a plan that has a 20 percent copay. Your premiums may actually go down as much as 30 percent." That's because insurance companies know that employees who make higher copayments use fewer medical services.
Everything comes with a price, of course. Higher copays can create employee dissatisfaction. "It's a controversial issue," acknowledges Alan Weiner, a Washington, D.C.-based actuary. "Some people wonder whether higher copays discourage needed care at the worst possible time: up front when health problems have not yet become severe." Nevertheless, Weiner advocates office copays between $10 and $20, with the objective of structuring the plan so that those who utilize it the most have to pay more. He adds that the effect of cost shifting can in some cases be made up by raising wages. That's because higher copays can result in premium decreases that are greater than the required wage increases.
In another cost-shifting tactic, employees can pay a higher percentage of the premium. This saves you money immediately, since you are essentially moving more of the expense from your shoulders to the employees'.
In yet another option, referred to as a "defined contribution plan," the employer pays a flat dollar rate rather than a percentage. "In essence, the employer says that rather than pay 60 percent, I will contribute, say, $100 per month and the employee makes up the difference," says Haugh. "This limits the employer's exposure to premium increases and shifts the cost to the employee." If an employer offers more than one health care option, a defined contribution plan causes employees to select their plan more carefully, since more comprehensive plans will cost the employee more.
Do your employees really want coverage for dental and vision care? Alternative medicine? Infertility treatment? Chiropractic and mental health? Maybe not. If such coverages are not mandated by your state, eliminating them can, in some cases, save up to 30 percent of an employer's health insurance bill.
"Make the benefits structure of your policy fit so that your company and your employees are not paying for what they don't use," says Sher Sparano, president of Benefits Advisory Service, a consulting firm in Forest Hills, N.Y.
Make sure the contract matches the coverages you want. For example, you may be paying for child coverage, when none of your employees have children. Maybe all they need is a rider for spouses.
Not sure what your employees need? Ask them. "A lot of our clients do employee surveys to discover preferences," says Gandolfo. "This is a change from the old days when employers dictated what they offered."
Consider flexible spending accounts
"Most small employers don't use flexible spending accounts ... and they should," says Weiner. These plans allow employees to spend tax-free money on medical care of their choice, as long as the care falls within very broad guidelines as mandated by the federal government. This allows for maximum flexibility. For example, one employee may want to spend money on dental costs, while another may take care of vision expenses, while still another may pay for an annual check up. In many cases, these categories of medical care are not covered by traditional insurance plans.
Here's how a typical plan works. You take out a major medical policy, which has a $2,000 deductible for each employee. As part of the plan design you ask each employee how much money they want taken out of their salary for the flexible spending account. If Joe says $1,200, then you take $100 a month pre-tax money and put it in a special account. Joe may then pay medical bills with the pre-tax dollars that have been committed for the year. If Joe spends less than $1,200, the difference goes back to you, the employer.
Suppose Joe spends $3,000 in a year. Of that amount, $1,200 is paid in pre-tax dollars. Joe pays $800 out of pocket. And the major medical policy kicks in for the final $1,000, minus any copay.
Although Weiner is a big fan of these plans, he cautions that they have a potential downside. Suppose Joe is reimbursed his full $1,200 for medical care that he receives in February. If he quits his job in March, after committing only $300 from his paychecks, you are on the hook for the remaining $900. "Perhaps these plans should be avoided in high turnover situations," says Weiner. "On the other hand, the risk is not a major one."
Note that you will need an accountant to set up such a plan, so that it conforms with federal tax regulations. You should also consider Medical Savings Accounts (MSA's) if your business employs a small number of individuals who are highly compensated.
Some of the approaches outlined here can be just the treatment for your health insurance ills. Employers may have to select a variety of cures, and review their plans annually to make sure employees are receiving the best benefit for the buck.
"The need to select more economical plans will become more important as the medical trend moves toward more expensive treatment," says Heemskerk. "There is really no silver bullet out there in the cost of medical care."
Beware of health insurance fraud
Although joining a purchasing group is one of the best ways to restrict the high cost of health insurance, you need to be careful about the financial stability of any group you join. If a group goes bankrupt, you can be stuck with big medical bills and no way to pay.
Experts say to consider whether the organization has a reason to exist other than as a vehicle for members to buy health insurance. "Organizations formed solely to offer health insurance attract members who are joining with the sole purpose of obtaining insurance," says Tim Harrington, a principal with Boston-based William M. Mercer, Inc., an actuarial consulting firm. These tend to be individuals in need of expensive care. That will drive up premiums and may bankrupt the group.
"In contrast, people join a chamber of commerce or other affinity group for other reasons," says Harrington. "Since most of the people are healthy and at work, rates will reflect a good collection of well people and a small collection of ill and sick people."
Also be wary of organizations that are not licensed and are outside the regulations of the state. Some groups attempt to say they are "self-insured," and thus do not fall under state insurance guidelines. These groups are prime suspects.
It's prudent to check out the bona fides of third party administrators: the organizations that collect the premiums and pass them along to the insurance companies. You run the risk that these entities will steal the money or go bankrupt. In many cases, the state guaranty fund may step in to replace funds that are lost, since technically the money belongs to the insurance company rather than the administrator. Even so, the prudent employer will check with the state insurance department, the Better Business Bureau, and other sources to determine the legitimacy of any organization. Does the group have a license to operate in the state? Does it have errors and omissions insurance? Are employees bonded?
Finally, be wary of health insurance carriers that offer deals that are too good to be true. "Sometimes insurance companies offer policies with low premiums that are loss leaders," says Harrington. "In subsequent years when people get ill, the rates go way up. Always check with the state insurance commission to identify good companies with stellar reputations."
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