The Bite of Healthcare
By Randy Southerland
Catalyst

udy Hayslett, chief administrative officer at public relations firm Hayslett Sorrel, is breathing a sigh of relief. After renewing policies for employee health insurance, increases in premiums only totaled 6 percent – far less than many other companies.

“I just reported at our staff meeting there would be no change in insurance company or doctors or new forms to fill out,” says Hayslett. “It’s a great relief to the employees.”

In an era of double-digit premium increases, many firms are finding although health insurance coverage is one of their biggest assets when it comes to recruiting and retaining employees, it can also be one of their biggest expenses as well.

Rising costs are forcing many companies – particularly smaller firms – to reduce benefits or pass along greater costs to employees. Cutting benefits remains a difficult choice for many executives. While health insurance can be one of their biggest line items, eliminating it increases the risk that valued employees may defect to competitors offering more generous benefits.

“Companies realize professionals are looking for a company that provides benefits – health insurance, dental insurance, some kind of 401(k) or retirement plan,” says Denise Grove, part-time CFO for Hayslett Sorrel. Grove, who works with five other firms ranging in size from 10 employees to more than 1,000, says her clients see health insurance as part of the cost of doing business. “Their people are their assets,” she explains. “That’s the way they retain their employees.”

Insurance costs are now rising higher than at any time in the last decade. Business was hit hard by big increases in the late ’80s and early ’90s. After health insurance premium inflation peaked at 18.6 percent in 1988, it declined to a mere two-tenths of 1 percent by 1997. The next year, costs soared to 6.1 percent and have been steadily rising ever since, according to figures from the latest Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans, the largest and most comprehensive survey on the subject.

While those figures represent national averages, the reality for many companies is quite different. “[Companies are] experiencing, in many cases, up to 30-, 50- or even 100-percent increases in premiums on renewals,” says Bert Fridlin, Georgia state director of the National Federation of Independent Business. A survey of his organization’s members showed 81 percent experienced increases of more than 10 percent in premium rates.

Experts say soaring health insurance premiums are directly linked to escalating costs in the $1.5-trillion national healthcare market. According to a Kaiser Family Foundation report, about one-third of this spending was for hospital care (32 percent); more than one-fifth for doctor services (22 percent); and almost 10 percent for prescription drugs. While pharmaceuticals was the smallest category, it was also the fastest growing – increasing two to five times faster than spending for hospital or doctor care. In 2000, drug spending increased by 17 percent.

“The increase in healthcare [insurance] premiums is really driven by the underlying problems in the health services sector,” says Dr. Pat Ketsche, assistant professor at Georgia State University’s Institute of Health Administration.

It comes as no surprise that according to a Pricewaterhouse-Coopers report for the American Association of Health Plans, medical costs are expected to increase by 13.7 percent this year. Only 2.5 of those percentage points can be attributed to general inflation. The rest of the increase is generated by advances in technology, such as new drugs and medical devices, increased reimbursement rates for doctors and hospitals, government mandates and regulations, increased consumer demand and malpractice litigation.

The reasons for these increases are many and complex, and don’t lend themselves to any quick fix, although industry observers have no shortage of possible solutions. This leaves business executives on their own when it comes to dealing with the rising costs. Many would clearly like to throw up their hands and get out of the traditional employer-provided health insurance market. Nearly all, however, realize the short-term gain isn’t worth the long-term cost to employee morale and performance.

So what’s an employer to do? Options are largely determined by the size of the company. Small and medium-sized firms typically don’t have the same resources or the room to maneuver as larger businesses.

Companies with more than 100 employees can often self-insure as a means of cutting insurance costs. Through self insurance, a company can set aside its own funds to pay for routine office visits and minor illnesses. A high-deductible insurance policy is reserved to cover more expensive claims such as heart surgeries and births. This approach has proved popular with businesses; more than half of Georgia’s 4.9 million workers with private health insurance are covered by these types of self-insurance plans. In addition, a self-insured company is also exempt from the 26 state-legislated mandates that require policies to cover services ranging from chiropractic care to mammograms.

“On any claim, we covered the first $25,000 in order to help reduce our premium,” says Grove of one of her client companies. Businesses can also turn to cost-containment companies that manage their HMO and PPO relationships and negotiate every bill to obtain the maximum savings.

The name of the game in health insurance is spreading risk across a large group. A company with fewer than 50 employees presents far greater risk for an insurance company writing a policy than a company with thousands of employees.

So small companies turn to their agent or insurance broker for help in keeping costs down. “[Brokers] have a lot to do with getting quotes from different insurers and trying to place comparable coverage,” says Grove.

Brokers who deal with a large number of carriers can assist companies in determining their insurance needs. Their independence enables them to seek out the best deal by soliciting bids from a number of carriers until they find a policy that suits their client’s needs. Underwriting standards vary widely, and quotes for the same companies can vary as well, depending on the carrier. For example, some insurance carriers avoid insuring small groups or charge a premium for the privilege. Some companies may not offer the products that a particular employer wants to buy.

NFIB’s Fridlin advises his members to find an agent associated with the Georgia Association of Health Underwriters.These professionals can also guide clients to products they might not have previously considered and help them to make the hard choices. For example, a company may need to drop its fee-for-service policy and change to an HMO plan. While choices of doctors and hospitals for employers are more limited under this plan, a switch may result in cost savings. Sometimes just changing carriers while keeping the same coverage can also result in savings.

“There is still a great variety of products out there,” says Bruce Wharton, vice president of Bryant & Wharton Associates, a business insurance broker. “[Companies] need to have the mindset that they may be not be able to improve their benefits or lower their costs as they could in years past.”

While relatively few companies seriously consider dropping insurance altogether, most are either trimming benefits by moving to more restrictive plans that don’t cover as many services or passing more of the burden along to the employee.“[Insurance carriers] are trying to combat this by raising co-pays,” says Wharton. “Prescription drug card co-pays have nearly doubled. What used to cost $20 is now $40.”

In addition, insurance carriers are offering defined benefit plans that allow employees to choose basic coverage with higher deductibles and co-pays for drugs and office visits, or buy into a more generous plan with lower co-pays and more generous access to providers who are not part of the plan’s recognized network.

By convincing employees to pay more for their healthcare, employers are slowly reversing a trend that some feel has served to disconnect workers from the true cost of healthcare. “I think we’ve all lost contact with what insurance is really for – to prevent catastrophic loss,” says Wharton. “Now we want our insurance to pay 100 percent of everything, but it’s getting to the point where [employers] can’t afford [to provide] it.”

When employees pay just $10 for a prescription or $15 after a trip to the doctor’s office, they often have little understanding of the true costs of the services they receive. “When you have [employees] bear even a small portion of the premium, they’re able to see – year to year – how the costs are changing and are more receptive to innovation in health plans,” advises Dr. William Custer of Georgia State University’s Center for Risk Management and Insurance Research.

As employees pay more, they tend to become better consumers of their healthcare services. The ultimate goal of many of these options is to encourage employees to shop around for the best deals in doctors and hospitals instead of seeking care regardless of cost.

The next step in that direction may come through a move to consumer-directed health plans. These policies typically couple a high-deductible policy with an upfront sum an employee can spend on healthcare. When that amount is spent, the employee’s share of the deductible – which may be as high as $5,000 – kicks in.

“The idea behind consumer-directed health plans is that if consumers are spending their own cash, they’ll be more price-conscious and they won’t have such a high demand,” says Ketsche. “The idea is if you make consumers use their own money or money you’ve given them, they’ll price-shop with that money more than if it’s just a covered expense.”

Unlike traditional flexible spending accounts already in use, unspent funds roll over to the following year. Employees have an incentive to build up their funds to cover a greater portion of the deductible.

Consumer-directed products are best suited to the higher end of medium-sized companies that can handle the increased administrative work associated with the plans. In addition, they place a greater burden on employees who must begin managing their own insurance in ways they were never able to do before.

“Health plan representatives, brokers and benefit managers need a high level of effort to educate consumers for them to understand consumer-directed products because they’re more complex than the products in the marketplace now,” says David Fields, general manager, consumer services at Blue Cross Blue Shield of Georgia. “Providers of information need to effectively use the Internet and other technology in order for customers to get to the information these plans offer and, furthermore, to understand them.”

While the economics of healthcare are often complex, many agree, for better or worse, one of the primary drivers of healthcare inflation is the very patient who wants and needs medical care. “One of the fundamental issues is the insatiable demand [for healthcare], but very few people understand the underlying cost of that demand,” says Fields.

One often under-utilized means of cutting down on demand is employee wellness programs. Programs for controlling hypertension, smoking cessation and fitness are not only popular with workers, but can also reap benefits for business through increased productivity, lower absenteeism and insurance rates as well.

“Employers have had wellness programs for quite some time and continue to try to find ways to offer them to employees,” says Custer. “The catch is, wellness programs, where the employer can capture the benefit, are widespread – smoking cessation is one.”Employers tend to avoid prevention methods, such as screening for certain diseases, whose benefits might not show up until years later – when the employee no longer works for them.

Even as businesses scramble to find new ways of dealing with the rising cost of insurance, some relief may already be on the horizon. The rise and fall in health insurance premiums are cyclical. While healthcare costs themselves are unlikely to fall, the era of 12- to 20-percent premium increases should abate in the next few years, according to Custer.

In the meantime, both insurers and the insured are seeking new ways of keeping costs under control, while continuing to provide vital benefits to workers. In many respects, their efforts are merely scratching the surface of the issue. One claims manager for a Fortune 500 company observed that until the demand for medical services decreases, companies will never be completely successful in controlling costs. Perhaps the answer to the dilemma will be found in the re-education of both the insurance provider and the consumer.


Legislation Efforts Often Increase Cost of Insurance
The problem of rising premiums for employee health insurance is nothing new. In fact, business owners have consistently said it’s one of their biggest problems, according to Bert Fridlin, Georgia state director of the National Federation of Independent Business. He keeps his finger on the pulse of business, and knows all too well the festering nature of the problem.

He concedes that despite considerable attention given to health insurance by legislators in Atlanta and Washington, D.C., the problem isn’t likely to get much better. There are, however, some hopeful signs that businesses and individuals will get at least a little relief in the year ahead.

Mandates. Over the years, the General Assembly has enacted 26 different mandates requiring insurance companies to cover all or part of specific conditions or certain treatments in their policies. Business groups have long argued that these state mandates push up the cost of coverage and make it less likely that small businesses will even offer coverage. Large self-insured businesses are not subject to these mandates.

A new bill – which died in the Assembly this past session – would allow optional policies where employers and individuals could have a choice of benefits. In other words, policies could be sold either with or without mandates to hold costs down.

In addition, even though the bill died in the Assembly this time, it will likely resurface again next year. Rising costs increase chances that the measure will eventually see the light of day.

In the meantime, groups such as the Georgia Chamber of Commerce keep fighting the addition of new mandates. “We’ve been able to turn many [mandates] into offerings, which means [insurance plans] have to offer that particular coverage to the employer, but the employer can choose not to include it in their plan,” says Amy Fincher, vice president for governmental affairs with the Chamber.

Tax Incentives. “We’re seeing, at the federal level, interest in tax incentives for small businesses and individuals,” says David Fields, general manager, consumer services for Blue Cross Blue Shield of Georgia. “Businesses get a tax break when they pay for premiums, but government is looking at some tax credits for individuals,” he says. This move will provide new benefits to workers while also taking some of the pressure off businesses that must pass a greater share of insurance costs along to employees.

Legislation has also been introduced that would allow for 100-percent deductibility from Georgia income tax for individuals who purchase health insurance, according to Fridlin.

Certificate of need. The General Assembly also plans to revisit the issue of certificate of need. That law gives the state permission to decide if and when hospitals can be built or expanded, or new equipment or specialties added. Opponents of the law charge that the law cuts down on competition and drives up prices for medical care, and, in turn, increases insurance premiums. They think the law should be repealed.

“Hospitals have used that [process] to create monopolies in certain areas,” says Fridlin.

Nobody is willing to predict how far these measures will go, or if they will even succeed. The only thing anyone is sure of is that getting and keeping health insurance will continue to be a necessary – but increasingly expensive – proposition.

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