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Is there a cure for rising health care costs?

Rising health care costs are becoming more and more difficult for companies to manage.  Health care costs in employee benefit plans have increased nearly 80% in just the last five years. According to the “Segal Health Plan Cost Trend Survey”, annual increases have been between 10 and 15 percent each year since 2000 with prescription drugs trending even higher! 

 

The forecasts beyond this year are for increases to drop below 10% and stay in the high single digit range.  While these downward trends are being trumpeted as progress in the right direction, they can be misleading.  Most of the decrease in the rate of projected premium costs is a result of plan design changes (higher copays, coinsurance, etc) and not true cost decreases in services rendered.  

 

Clearly, as human resource and firm administrators, we are in the hot seat to find a “cure” to the double-digit cost increases in our health insurance programs.  Finding this cure i a daunting task.  As costs have continued to rise, health benefits have become increasingly important to employees.  A Towers Perrin survey shows that these programs are second only to competitive base pay in attracting employees to an organization.  They can also contribute to a company’s reputation as a good employer, which in turn helps retain good people and engage them in the business.

 

What’s more, health benefits, in the eyes of many employees are symbolic of how a company feels about its employees according to the same study.  When employees feel that the company cares about their well-being, they are much more willing to invest their time and energy in the company’s success. 

 

So what can we do to offer our firms and our employees great health insurance benefits without breaking the bank? 

 

The Law Firm Effect in Boston

 

Law firms have faced increases larger than those mentioned above.  Surveys are typically geared toward large employers who can offer a variety of plans and wellness programs.   The law firm community in Boston faces even more challenges in controlling spiraling costs: 

 

Size:     Most firms have fewer than 100 employees.  Our relatively small size gives us no credible or predictable cost experience.  Therefore, we have little buying clout.

Lawyers!:  We have a highly educated workforce that wants a health care system that is simple to use, requires little paperwork, has lots of choices and access to the best facilities.  Lawyers want to ‘bill time to clients, not fill out paperwork!’

 

Boston:  Boston is truly the medical hub of the world.  We have the finest teaching and research facilities in the world.  We are also the most expensive major metropolitan area in the country for healthcare with an average of over $8,100 per person in 2005. 

 

Blue Cross:  BlueCross/Blue Shield has a near monopoly in Massachusetts.  Many managing partners insist on the brand.  This lack of serious competition and brand loyalty drives premium costs ever upwards.

 

Some short-term saving opportunities

 

Plan Design

 

Plan design decisions cover the type of plan (HMO,PPO), deductibles, coinsurance, copays and Rx benefits.  Recent trends have shifted more costs to the employee via increasing deductibles and copays.  Coinsurance, which splits the cost between the insurance carrier and the participant is gaining more and more popularity.   In the western part of the country, 90/10 HMO plans in which the participant pays 10% of all costs up to an out of pocket maximum of $1,000.00+ are becoming very common.  These plans are slowly moving eastward.

 

According to a Watson Wyatt analysis of health benefit plan expenditures, the 4 percent of participants with serious health conditions account for nearly half of health benefit spending in any one year.  This group is unlikely to be won over by financial incentives or plan design features, such as a high-deductible health plan paired with health savings accounts, which allow employees to save for health care expenses on a tax-advantaged basis. 

 

That being said, plan design changes can save you some real money.  For example, different levels of Rx copays may affect your premiums by 2-3%.  HMOs are more affordable than PPOs.  Work with your broker to investigate several plan designs and their various premium rates.  Think outside the box and you can save some real coin.   

 

Effective plan designs break down the amount of employee contribution by percentage rather than by dollar amount.  The employees then know that when (not if) premiums rise by 10% in a given year, their contribution will go up proportionally.  

 

Another point to consider when altering plan design is that employees often have difficulty in accepting change.  In many instances employees may have had the same coverage for several years and have become very comfortable with it.  Employees may meet plan changes with resistance, frustration and disengagement as they typically view changes to their health plans as the “taking away” of a benefit.    While changes to the plan design are often necessary,  you must carefully consider how best to announce the  change within your firm.  A thoughtful delivery will go a long way in minimizing any lasting negative effect on office morale. 

 

Plan Funding

 

Most health insurance plans are called fully insured plans.  This means that you pay a monthly premium and the insurance company pays for all covered medical costs.  The vast majority of plans are structured this way.

 

Do you have more than 100 employees and want to save some money?  Look closely at  self-funded plans.  These are plans in which the employer will take on some risk by paying costs directly via a third party administrator.  The rationale for this approach is to absorb the profit and underwriting risks that the carriers build into their monthly premium to save cost and improve your cash flow.

 

What are partially self-funded plans?

 

In a self-insured plan, you are responsible for the health care costs, primarily claim payments and administrative expenses, for your participants.  Administrative expenses typically consist of a cost per subscriber per month to administer and process your claims. 

 

A catastrophic illness or disease would have devastating effect on the financial integrity of your plan.  Plans need to be protected from extraordinary expenses and catastrophic illnesses.  You accomplish this by purchasing Stop Loss insurance.  Stop loss insurance is a type of insurance that enables self-funded employers to limit their claims liability. 

 

There are two types of stop loss insurance:

 

1. Specific Stop Loss.  Also known as individual stop loss, it is specific coverage for a member and sets a high deductible –typically $50,000 to $250,000 per policy year.  Claims less than the specific deductible are excluded from the stop loss protection.  Specific stop loss is designed to protect the employer from catastrophic claims for conditions affecting a single individual, such as cancer or organ transplants. 
   
2. Aggregate Stop Loss.  This coverage protects the employer from unexpected claims due to higher than average utilization or frequency, or due to severity.  Aggregate stop loss coverage protects the employer’s claim liability in total (aggregate) for the policy year.  This typically is set at a level around 125% of anticipated claims. 
   
   The amount of risk to be reinsured is a function of the employer’s size; nature of business; claims experience; and the ability and willingness to balance risk with cash flow and investment opportunities.
   

    

    

Partially self funded plans can save you a substantial amount of money if you are a growing organization, especially one that is growing younger.  They offer some very compelling cash flow savings, especially during the start up phase, since claims start coming only after a couple of months.  As the illustration above highlights, if your group is extremely healthy, and you have lower than normal claims, you can see the real savings possibility.  However, partially self funded plans are not for everyone.  As mentioned above, carriers typically do not believe that groups under 100 persons have any underwriting credibility and predictability, so they will often not underwrite smaller groups. 

 

A typical fully insured plan will cost you somewhere between the projected costs for your group and the maximum cost for your group.  This highlights the carriers hedging their bet to ensure group profitability.

 

If you have more than 100 people in your group, partially self funded plans are definitely worth a close look to help curb the cost increases that we are facing.   

 

Smaller groups between 50 and 100 people may want to take a look but in most cases, the business model simply does not scale well.  You will need to use third party administrators who do not have the buying clout of the big Massachusetts providers and the stop loss coverage can be very expensive for groups of this size.

 

Looking down the road

 

Longer term savings opportunities are on the radar screen.  However, with employee turnover and organizational changes, they will be difficult to measure the effects on any one company.

 

As discussed at our April luncheon, identifying high risk employees before they get sick via Health Risk Assessments and fostering a culture of wellness will help firms control medical costs in the future.

 

Providing some real consumer driven incentives by allowing people to have access to costs information at each facility before a procedure is done will have a major impact on costs.  Such cost transparency, will allow you to know how much the treatment will cost at Winchester Hospital and how much it will cost at Mass General.  A relatively simple procedure can cost more than 5 times as much at the large teaching facilities.  Often, the smaller facility is a better choice.

 

Health Care Managers are coming!  These folks will help you make informed decisions about treatment options and costs.  They will help identify quality providers and steer you in the right direction.  They can even access your health data to see if a diabetic is taking his prescription and the like.  They will help you decide on different treatment options.  They will play a critical role in evaluating the costs transparencies mentioned above  by reviewing procedure costs at different facilities. 

 

Some futuristic thoughts include seeing the traditional insurance products go away and be replaced by a 401(k) type of product and allowing each person to purchase his or her  own coverage.  Sounds out there, but you never know.

 

Summary

 

Increasing health care costs have no magical cures.  As a society we are getting older and fatter and are living longer.  As a result, we are using the healthcare system more and demanding the latest advances in medical technology.  New prescription drugs are exploding around us every day.  Arguably, we have access to the best health care in the world and will always want the very best in care.

 

Some exciting changes on the horizon should help control costs.  Imagine shopping on the web for a good price for an appendectomy.  When we get to that point, the capitalistic supply and demand model that has fueled our economy since our inception will be at work driving medical care costs downward.  Let’s hope that day comes soon.   

Authors: Kevin Costello, Executive Director, Campbell Campbell Edwards & Conroy, P.C.  Thanks to Ted Osiecki, Benefit Plan Designs, Burlington, MA  and William McKelvey, President, Medical Claims Services, Quincy, MA for their contributions.

 

For further information:

 

2006 Segal Health Plan Cost Trend Survey
http://www.segalco.com/publications/surveysandstudies/2006trendsurvey.pdf

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