PROVIDING HEALTHCARE BENEFITS to employees has escalated from a cost management challenge to an issue that is threatening the financial health of many waste companies. Some businesses even are considering eliminating health benefits altogether. Faced with a potential upsurge in the nationwide number of uninsured individuals, politicians at all levels have been forced to enter the fray. Indeed, everyone is being confronted with the problem of reigning-in costs.
Why are Costs Rising?
The increase in health premium costs is a reflection of the risk of being insured. In other words, healthcare expenses — not the cost of health insurance — has exploded. Many people consider health benefits to be an employee entitlement, which often makes decisions regarding health plans especially difficult for the sponsoring organization.
An alternate view considers the dollars a company spends on healthcare benefits as an investment. Like any investment, the company must be able to afford the investment and must devise a sound method of projecting and monitoring its return. Quantifying the return on investment provided by employee satisfaction with a company health plan is subjective, but it's easy to understand that dollars spent on a plan that creates employee dissatisfaction and mistrust are dollars that have yielded little or no return.
The recent trend of spiraling health insurance premiums is a return to a cycle that occurred in the late 1980s and early 1990s. According to the Kaiser Family Foundation and Health Research and Education Trust 2003 Employer Health Benefits Survey, insurance premium inflation peaked in 1989 at a national average of 18 percent. At the time, overall inflation was 5.5 percent. Health insurers responded to the crisis by taking control of health plan use to manage expenses. From these efforts, health maintenance organizations (HMOs) were born.
HMO plans took a two-pronged approach to cost containment. The first, and most effective, tack was to directly reduce expenses through contracts committing providers to steep discounts off “retail” pricing. In return for agreeing to the discounts, participating physicians and facilities enjoyed increased patient demand with no marketing expenses. Second, it was envisioned that managed care plans would improve the population's health through better relations between the patient and his primary care doctor. The affordability of a healthy population versus a sick one is obvious.
Managed care seemed successful as inflation rates fell. By 1995, premium inflation matched overall inflation and was below it in 1996. Unfortunately, 1996 also was the turning point, and health premium inflation rates have since risen to a predicted level of 13.9 percent in 2003. Both large and small businesses have realized premium increases that have outpaced the national average.
Cutting Care Costs
Some health benefit options can reverse the escalating cost trend, primarily by helping the insured to understand the true cost of healthcare. Consumer-driven health plans (CDHPs) evolved from the recognition that managed care plans using fixed co-payments (co-pays) shield the insured from healthcare's true cost. For example, if you ask an employee about the cost of a doctor's office visit, he will likely quote the amount of plan's co-pay. In this environment, the patient is not invested in tracking and managing his expenses.
The practice of insulating consumers from healthcare's costs is best illustrated by a 2001 survey conducted by Mercer Human Resource Consultants, New York, which showed that the portion an insured paid for his healthcare costs fell from 57 percent in 1970 to 27 percent in 2001. The 30 percent shift was a direct transfer of expense from the individual to the health plan. Plan members, in many cases, have never been informed of the increased burden their employers are carrying. Thus, the financial burden to the employer grew without providing any additional return in the form of greater employee appreciation.
CDHPs create a partnership between the insured and his employer in managing healthcare expenses. Most consumer-driven plans try to eliminate co-pays in favor of a fixed fund an employee may use to pay first dollar healthcare expenses. Once the fund is depleted, the employee becomes responsible for 100 percent of the expenses paid in the form of a relatively high deductible. After satisfying the deductible, conventional co-insurance may begin, with the plan and the insured sharing expenses. Finally, a defined maximum out-of-pocket amount is reached, and the plan pays all expenses above this point. Some plans include a separate preventive care allowance to continue promoting prevention and early detection over disease treatment.
To be effective, CDHPs must provide employees with the tools necessary to make wise, cost-effective decisions regarding healthcare use. This might include cost data and treatment outcome data for facilities and providers in a specific geographical area. As with any purchasing transaction, an educated consumer is an empowered consumer.
When structured properly, the insured is doubly motivated to be prudent with healthcare use, because if the employee can keep expenses below the amount of his first dollar fund, he can entirely avoid out-of-pocket expenses. The opportunity for the insured to roll unused dollars from his fund to next year's plan is equally powerful. Typically, rollovers are allowed until the fund is equal to the member's annual deductible exposure.
Initially, employees may express concern about the added exposure of a high deductible. Once enrolled, however, most members report higher satisfaction levels versus conventional managed care plans.
Employers who were managing healthcare benefits prior to the advent of managed care may sense that these plans resemble indemnity plans prevalent prior to 1990, and they are similar. Some characteristics of managed care remain. For example, linking benefits to a contracted provider network has been retained. Regardless of the type of network, the savings available through contracted physician discounts are too significant to abandon. Likewise, it is important to continue effective prescription benefit, disease management and wellness programs because they are accompanied by proven cost savings.
Do CDHPs Work?
The first significant CDHPs were launched in 2000 with most being added as enrollment options for employees of very large organizations. CDHPs have since filtered down to midsize and small group markets. The results have been impressive.
Humana Insurance Co., Louisville, Ky., first introduced a CDHP internally by making the plan a benefit option for its 17,000 employees. Cost inflation for CDHP enrollees fell from 17 percent predicted for Humana's conventional plans to 6.2 percent after the first year. Second year results were even lower, with a rate of 5.7 percent. In the second year, employee CDHP enrollment doubled the rate expected, which Humana attributes to a high level of employee satisfaction. Humana employees controlled the dollars in their health fund and were given a flexible enrollment system allowing them to customize benefits and premium costs to match their needs.
Aetna Insurance Co., Hartford, Conn., also has reported dramatic results for its Health Fund CDHP products in the commercial market. For the 2002 to 2003 plan year, medical cost for members enrolled in its CDHP grew 1.5 percent versus a 15.7 percent increase in medical costs among members enrolled in conventional products. Other insurance carriers report similar successes in fully insured and self-funded settings.
The Bottom Line
Despite high costs, few employers have yet or want to eliminate existing health benefits for their employees. According to the Kaiser Family Foundation's survey, less than 1 percent of employers indicated they were very likely to drop benefits in the next two years. Similarly, the percentage of premiums paid by employees for single coverage did not change and family coverage fell by 1 percent. Businesses continue to value the investments they make in providing healthcare.
As cost pressures grow, companies have begun to shift an increasing share of the burden to covered members. Nationally, in-network deductibles grew 9.5 percent since last year, with a 20 percent increase for out-of-network providers. Likewise, the number of HMO plans offering $10 office visit co-pays fell from 51 percent in 2002 to 33 percent in 2003. In 2003, 10 percent of HMO plans charged office visit co-pays of more than $20, up from 3 percent in 2002.
Currently, only 5 percent of all health plan sponsors offer the high deductible options found in CDHPs, and only 13 percent of those match the plan with a corresponding employer-paid health fund. Still, employer interest is growing, with 8 percent of companies indicating they plan to introduce such options by 2005. These plans received additional support when the Medicare bill passed in 2003. In addition to addressing prescription drug coverage for seniors, the bill expanded the scope and availability of medical savings accounts (MSA).
The newly created healthcare savings accounts (HSAs) are available to businesses of all sizes and have few of the restrictions imposed on the original MSA plans. The tax-preferred benefits included in the legislation reflect federal endorsement of the consumer-driven concept. Some insurance carriers already are offering products compliant with HSAs at premiums as much as 30 percent below comparable PPO plans.
Managing a company's health insurance premiums requires modifying the behavior of insured employees so that they adopt a consumer's mindset in making healthcare decisions. By making the cost of care transparent to employees and by designing plans in which members are financially invested in controlling those costs, health plan sponsors can regain control of their plan expenses and improve employee satisfaction at the same time.
Mark Seeberger is president of R.G. Seeberger Co. Inc. based in Dallas.
WHAT'S DRIVING INFLATION?
Among the factors driving healthcare inflation since 1996 are:
Prescription Drug Cost and Use. Includes direct-to-consumer advertising, aggressive marketing to doctors, patent management, directed research efforts, favorable tax rules and industry “oversight” by the Federal Drug Administration (FDA).
Co-Pay Structured Benefit Design. When employees are shielded from the true cost of healthcare.
State-Mandated Benefits. This varies, but is significant in large states such as California and Texas.
Failed Insurance Carrier Pricing Initiatives. In the past, many carriers attempted to gain market share through loss leader pricing of HMO products. This often is linked to subsidy by expected Medicare HMO revenue.
Failure of Risk-Bearing Contracts Between Carriers and Physician Associations. Provider associations accepted risk and use management authority while carriers provided membership.
Cost-Shifting from Medicare. The Balanced Budget Act of 1996 cut Medicare reimbursements to facilities and providers up to 30 percent. The costs were transferred to the commercial sector as network contracts were renegotiated. Medicare reimbursement cuts continue today.
Don't miss the educational session “How to Choose the Right Health Plan for Your Company When Costs are Skyrocketing” at WasteExpo in Dallas.
Date: Tuesday, May 18
Time: 10 a.m.-11.15 a.m.
R.G. Seeberger Co. Inc.'s Mark Seeberger will be joined by Johnathan Kiser of Gershman Brickner & Bratton Inc. For more information, visit www.wasteexpo.com.