A little help: employers are turning to consultants and brokers to take the hassle out of self-funded health plans. (Industry Strategies: Self-Insurance).

Last year, Michael Taricano faced a big decision concerning his company's health insurance. The cost had risen for the past four years, and it was about to rise again for International Manufacturing Solutions, a Nashua, N.H.-based provider of shoe-manufacturing equipment that employs 80 people.

Feeling a heavy responsibility for the company's employees and their families--including some severely ill children--as well as retirees, Chief Executive Officer Taricano knew he had to make some changes. "We had to confirm renewal of Our contract within 30 clays. United Healthcare notified us [that] we had a 52% increase in the price of our plan. That left us very little time to find alternatives, and that's where Benemax came in," Taricano said.

Benemax is one of many health insurance consultants and brokers that help employers nationwide manage their rising health insurance costs. The intermediaries construct and negotiate self-insurance plans and teach employees the importance of assuming more responsibility for their health insurance use.

Because small and midsize employers wear a lot of hats and don't have time to investigate health insurance, they especially need consultants to help them find the right plan and save money. Taricano had spent four years researching and negotiating health-plan contracts, but as the company's needs grew more complex, it became more difficult and too time consuming. "We did not have a full-time human resources person," Taricano said. "We put in several hours and made mistakes until we got to the point of choosing a consultant. Since they deal with several health insurance companies, they know how to negotiate and what to provide' The bottom line for Taricano is that Benemax negotiated improved health-care coverage for significantly less money and provided a seamless transition to the new plan.

Benemax offers a range of self-funded coverage plans. A typical arrangement has the following features: The first $1,000 an employee spends is paid by the employer; the employee pays 20% and the employer pays 80% of the next $5,000 incurred; and after that, the Benemax plan pays 100%. For prescription drugs, a Benemax customer would ask its employees to pay the first $250 per year for prescription costs per member. So, an employee with a spouse and two children would be responsible for the $250 deductible for each member of the family.

"The trend is to get away from the formulary and get employees to look for cheaper drugs and pharmacies," said David Cowles, president and founder of Benemax.

Why Concern Is Growing

When the economy was healthier, employers were better able to absorb rising health insurance costs. But now, "double-digit health insurance increases are back at a time when employers are struggling with profitability," said Daryl Veach, Ernst & Young's national director of health actuarial services.

As a result, more companies are asking employees to share the costs and, in return, are giving them choices. A recent UCLA Anderson Forecast reports that 65.5% of the 460 companies surveyed are requiring their workers to pay more for health insurance. Christopher Thornberg, senior economist with the forecast, said this contrasts with the 1980s and 1990s, when employers absorbed the rising costs. Employees are learning to share responsibility for their health insurance benefits by contributing more toward the premium, while employers are turning to self-funded plans to keep costs down. This is a pattern similar to the shift from company-funded retirement plans to employee-funded 401(k)s. 'We're beginning to be successful in changing the way Americans think about health care. For several generations, someone else managed Americans' health. Now they have to take more responsibility, as in the pension area;' Cowles said.

One employee-benefits consulting firm forecasts that the rates charged by health maintenance organizations will rise more than 20% next year. "We are seeing unprecedented HMO increases for 2003. With no clear solutions on the horizon, we expect that it's going to get worse before it gets better," said Mindy Kairey, a health-care consultant for Hewlitt Associates.

Several trends are causing healthcare--and therefore, health insurance--price hikes. Data from the Employee Benefit Research Institute shows that the employee-benefit research community believes that more than 50% of medical insurance cost increases come from technological advances, such as surgical techniques, drug therapies and diagnostic and treatment devices. For example, a ventricular-assistance device prescribed by doctors for patients awaiting a heart transplant can cost $160,000, according to Evergreen Re, a health-care reinsurance consulting firm.

And prescription-drug prices continue to rise. IMS Health, a global health-care information company, reports that drug sales through retail pharmacies grew 11% to $263 billion from June 2001 to May 2002. The sales increases are driven by direct-to-con sumer advertising and the use of expensive brand-name drugs.

Drilling Down

Self-funded health-plan consultants view their jobs in two parts--assessing the overall plan to ensure it's running efficiently and helping employers persuade their workers to take more responsibility for controlling a plan's use and costs. Consultants can help self-funded plans use the information from the plan's assessment to predict expenses so they can adequately budget from year to year.

Consultants examine every area of a self-insured plan, looking for use trends, analyzing specific cost drivers and assessing the use of physician and hospital networks. "One of the indicators that we look for is the use of high-cost hospitals to see if in-patient confinements are longer than expected. On the out-patient side, we examine where members are going, identify the most costly services and track where money is being spent," said Barry Rosenfeld, an assistant vice president for NiiS/Apex, a Princeton, N.J.-based consulting group.

By looking carefully at the prescription-drug portion of a self-insured plan, consultants can uncover hidden cost drivers and save money without cutting coverage, said Evergreen Re. Fewer than 10% of plans audit their retail-pharmacy use regularly, even though research shows that up to 3% of drugs are prescribed for members who are no longer covered by the particular plan, said Evergreen Re President Charles Crispin. Inspecting prescription use also can reveal whether members are obeying the rules about refills and not costing the plan more money by refilling prescriptions too early. Prescription-drug use also can be studied to predict a plan's future use based on employee demographics. For example, by tracking a member's prescription-drug history, consultants can infer a future diagnosis of chronic high blood pressure and use the information to structure the plan more effectively.

Another tool to reduce plan expenses is to educate members about the realities of using the coverage. Many consultants use questionnaires and focus groups to inform employees about their plans. "It's important to make members understand that when they go to the doctor, it costs the plan $138 instead of the $5 they pay. It's not unlike a tenant turning up the thermostat and the landlord paying the bill," said Rob Eichler, an independent health-care consultant based in New Hampshire.

The beginning of the year will mark the first anniversary of the shoe-equipment manufacturer's self-insured plan, and Taricano said educating his employees about using the health plan is something that needs to be done. "It's something we're talking about now. We'll look at the utilization history and see how to structure it," he said.

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After years of feedback from consultants and brokers, one of the largest health insurers in the United States created a self-funded plan that gives consumers a choice of structures. Humana reports that there are about 620,000 members in its self-funded unit, which is one of the insurer's fastest-growing business areas, said Michael Langford, director of administrative services organization development.

Reacting to the growing complexity of contract negotiations, Humana developed SmartSuite, a plan that's being offered to employers with more than 300 employees in most Humana markets. "We want to take ourselves out of the middle of the health-care delivery system and put the consumer there, allowing them to make the choice of how much they want to pay We want to become more of a consumer-directed delivery system that allows consumers to make informed decisions about their health care," Langford said.

Using Internet and database technologies, SmartSuite allows employees to select from a variety of flexible deductible and copay structures, based on their healthcare needs and budgets.

Humana includes an online Health Plan Wizard that assists employees in choosing the correct coverage by asking enrollees questions about health-care needs and financial status and providing a side-by-side comparison of plans. SmartSuite offers options--such as a traditional health maintenance organization and a preferred-provider organization--and customized plans--such as CoverageFirst, which features a higher deductible in exchange for lower premiums.

To address the rising costs of prescription drugs, Humana designed SmartSuite with a fourtier plan. Humana developed the tiered drug plan based on the effectiveness of the drug and its medical outcomes, Langford said. The first tier features the lowest copay with brand and generic drugs; the second tier has more expensive brand-name drugs and generics; the third tier is primarily brands with lower-cost equivalent drugs in the first two tiers and has a higher copay; and the fourth tier is reserved for fewer than 1% of all drugs prescribed, such as biotech and new drugs on the market. In the fourth tier, the consumer would pay 25% of the cost of the drugs, with a maximum of $2,500 out of pocket each year.

"We work hand in hand with brokers and consultants--a collaborative working relationship is key to us," Langford said.