Rx for Health Insurance Costs

Rx for Health Insurance Costs

If you're like most employers you're seeking the perfect solution to the health insurance puzzle: A benefits package that keeps your employees happy and productive without taking a big bite from your bottom line.

Looking's not finding, of course. Commonly a policy starts out looking great — then suddenly gets too expensive when premiums skyrocket.

How can you keep a lid on costs? Some answers are contained in reports just released by Mercer and the Kaiser Family Foundation — two organizations that have tracked employer-sponsored health insurance for decades.

First, some good news: Employers like you held premium increases to six percent in 2008 for a fourth straight year, according to Mercer, a New York City-based consulting firm. That's a welcome change from the double-digit increases earlier this decade.

On the down side, premiums are still increasing at more than twice the rate of inflation. Even worse, employers are expected to face higher costs in 2009 and beyond as a stubborn recession combines with an aging population to exert more upward pressure on premiums.

Troubled times, higher costs

The nation and the world are shifting into low economic gear. That can mean higher expenses in the benefits area. “In each of the last two recessions, employers experienced a huge spike in health insurance costs,” says Joan Smyth, a principal in Mercer's health and benefits practice. “Premiums peaked at 14.7 percent between 2001 and 2003 and at 17.1 percent between 1990 and 1991.”

Why do slow times drive higher costs? Smyth cites several causes. “Employees who believe their companies are likely to reduce benefits, or who fear being laid off, often decide to undertake discretionary procedures such as knee surgeries and hip replacements.”

For the same reason, says Smyth, employees who lose their jobs and are eligible for a continuation of health insurance under COBRA also tend to engage in costly medical procedures before their coverage lapses. And one more thing: The stress levels that come with difficult economic times can create health problems that require medical care.

Whatever the cause, higher demand for medical services translates into steeper premiums. Demographics, too, come into play. Older individuals often require more care. “As the population ages, the problem of health insurance costs will not go away but only be enhanced,” says Sally Natchek, senior director of research at the International Foundation of Employee Benefit Plans (IFEBP).

For all these reasons health insurance is expected to be more expensive in the years ahead. “We expect carriers to be quite aggressive in terms of premium increases,” says Smyth.

Small employers, more challenges

Finding the right health insurance is tough for all businesses. Those with fewer workers face a special challenge because they lack the leverage to negotiate favorable deals. “The folks that are really at a disadvantage are the very small employers,” says Andrew Webber, president and c.e.o. of the National Business Coalition on Health (NBCH). “The cost of health insurance can be exorbitant, particularly if the employers have a couple of people with chronic conditions.”

Little wonder, then, that only 62 percent of firms with fewer than 200 employees offer health insurance, far fewer than the 99 percent of larger firms, according to the new report from Kaiser, a Washington, DC-based research group. And only 49 percent of firms with fewer than 10 employees offer the benefit.

When smaller employers do offer insurance, the plans are usually less generous. Workers face higher deductibles, bear a greater share of premium costs and pay more of their medical expenses out-of-pocket in the form of copays.

Given the costs of health insurance, it's tempting for smaller employers to reduce benefits or even do away altogether with the benefit. That can be counterproductive: “If you want to attract and retain good people, you need health insurance,” says Webber.

Burden Sharing, Cost Cutting

What can you do to save money on your own health insurance costs? For starters get a jump on the problem by taking a fresh look at your plan and seek alternatives before premium hikes surprise you in the months ahead.

Second, consider having employees shoulder more of the health insurance burden. That's long been the most powerful method of controlling costs. The trend held in 2008 when premiums would have increased eight percent without cost shifting, according to Mercer.

You may want your employees to increase their financial contributions in three areas: Premiums, copays and deductibles.

Let's consider each:

  • Premiums

    At small firms, workers contribute $4,101, or some 34 percent of the average annual premium of $12,091, for family coverage. They contribute $624, about 14 percent of the average annual premium of $4,586, for single. (For the purposes of their surveys, Kaiser defines a small business as having fewer than 200 employees).

  • Copays

    Today, $20 copays are pretty much the norm and are starting to inch higher. While higher copays help reduce medical costs as employees think twice about seeing their doctors, Smyth cautions against making employees pay more than $5 to $10 for their generic prescription drugs. “You don't want people to stop taking their maintenance drugs,” she says. “That's a false economy that can lead to costly medical conditions down the road.”

  • Deductibles

    Standing Together, Capping Expenses

    Perhaps the most dramatic change has come in the total amount that employees pay before insurance takes over. At small firms the percentage of covered workers with a deductible of at least $1,000 has increased from 16 percent to 35 percent, says Kaiser. The average deductible is $917 for single coverage and $2,367 for family.

Employers are increasing out of pocket ceilings as well. For small firms out of pocket maximums are $4,634 for family coverage and $2,207 for single, reports Kaiser.

Another cost control tactic is a waiting period for new hires. Extending the period from 30 to 90 days, for example, will save an employer a couple of month's premiums. That can also help avoid the problem that arises when employees work for a short time but are then eligible for COBRA coverage. Although they need to pay their own COBRA premiums, the medical procedures they receive can still result in a premium hike.

Acting alone, the single employer has limited negotiating clout with health care providers. For groups of employers the story is much different: Health care coalitions can often help reduce the expenses associated with such programs as drug and vision benefits, dental plans and disease management.

There are nearly 60 regional health coalitions in the U.S. and each is idiosyncratic in operations and benefits. “No one coalition is identical with another,” says Paul W. Brand, executive director of Employers' Coalition on Health (ECOH). “The saying in the field is ‘When you've seen one coalition….you've seen one coalition.’”

Different as they are, coalitions usually fall into one of two broad camps. The first is focused on education and quality control. The second, much smaller, consists of group purchasing organizations. It is to that second group that ECOH belongs, handling provider negotiations for some 160 employer members with nearly 50,000 employees in northern Illinois and southern Wisconsin. About a quarter of the members have fewer than 200 employees.

“Our job is to manage the supply chain by contracting directly with providers such as hospitals and doctors,” says Brand. Because ECOH cuts out the health insurance carrier middleman for self-funded member companies, the result is lower costs for member employers. At the same time ECOH has key partnerships with carriers to serve smaller member companies.

Negotiating better deals is tough work. That's why so few coalitions are up to the challenge: “Maybe a dozen coalitions do what we do,” says Brand. “It is very difficult and the competition is stiff.”

In some cases coalitions offer health insurance itself at a reduced rate by bidding their employer members as a block to carriers. This is rare, though, for a number of reasons. Perhaps the most important is that for such groups to work a good percentage of the members need to be healthy and well. And, unfortunately, groups offering health insurance often attract only employers who are having trouble getting affordable insurance because they have employees with chronic conditions. Insurance companies view such employers as high risk. At the same time, employers with basically healthy worker populations can often get better deals on their own — at least until they have a few individuals who get catastrophic illnesses.

Coalitions offer another benefit besides lower cost: the greater choice otherwise available only to large organizations. Employees of the 160 member organizations of the New York Business Group on Health (NYBGH) can select the plan they want from 26 health-care options plus dental, long-term disability, life insurance and accidental death and dismemberment coverage. “We allow the small business to offer big business benefits,” says executive director Laurel Pickering.

To find a coalition near you, visit the NBCH website, www.nbch.org [4]. Click on “Membership” and then on “Coalition Members.” NBCH monitors its membership for quality. “If the coalition is a member in good standing you know you are dealing with a quality concern,” says Brand. Additionally, your local chamber of commerce may have information on active coalitions.

Informed Employees, Healthy Workers

Shifting costs, cutting benefits and joining coalitions: All of these efforts can help tame the health insurance monster. Change can be frightening, though, and employers need to maintain open lines of communication with workers to avoid affecting morale.

“It's a mistake if employers do not adequately communicate health benefit changes to employees along with the reasons why changes are being made,” says Natchek. “People need to feel they are partners. They need to understand the true cost of health care, how their actions can make a difference and how they can become healthier individuals.”

Wellness Programs Control Costs

Cost shifting will likely remain a vital tool for employers looking to control health insurance premiums. After decades of use, however, the technique may be approaching a point of diminishing returns. “The low hanging fruit has been picked,” says Joan Smyth, a principal in Mercer's health and benefits practice.

Today's employers are paying greater attention to programs that keep people healthy and encourage faster recovery when they do get sick.

“While the usual cost sharing efforts are still very common, the International Foundation's survey shows that employers are seeing they are not always the most effective answer,” says Sally Natchek, senior director of research at the International Foundation of Employee Benefit Plans (IFEBP). “That's why there is a growing trend toward disease management programs which take an integrated approach toward working with individuals who are or may be at risk for chronic conditions, among the most prevalent and costly of illnesses in the U.S. Coupled with wellness programs, these efforts put a great deal of responsibility on the individual to monitor their lifestyle choices. While such programs increase workforce productivity, their main benefit is that they result in a healthier work force.”

The Kaiser survey finds that more than half of all firms offering health benefits also provide at least one of seven wellness programs: weight loss programs, gym membership discounts or on-site exercise facilities, smoking cessation programs, personal health coaching, classes in nutrition or healthy living, web-based resources for healthy living or wellness newsletters.

How to Learn More

New reports from two major research organizations describe how employers are addressing the issue of rising health care costs.

“The 2008 National Survey of Employer-Sponsored Health Plans,” from Mercer, New York City is a comprehensive survey of data from 2,900 employers. For a free abstract, go to www.mercer.com/ushealthplansurvey [5] and click on “View survey highlights press release.” The full report will be available for a fee in early 2009.

“Employer Health Benefits 2008 Annual Survey,” from The Kaiser Family Foundation, Washington, DC offers a detailed look at trends in employer-sponsored health coverage. For a free summary of findings visit http://ehbs.kff.org [6].

Kaiser has also released a comparison of health insurance benefits at large and small employers. For a free summary visit www.kff.org [7] and click on “Snapshots: Health Care Costs.”