How firms contain costs.

Rising health care insurance costs are a problem for all businesses, CPA firms included. According to a survey of current and former members of the American Institute of CPAs management of an accounting practice committee, nearly half have raised deductibles or employee contributions in the past three years in an effort to contain costs; more than one-third changed insurers (see the exhibit on page 64). Practitioners' other approaches to this challenge range from setting strict limits on their own contributions to becoming their own insurers. Here are some of their stories.

DO IT YOURSELF

Doak, Cuppett & Poling, in Clarksburg, West Virginia, began funding its own health insurance plan four years ago, according to managing partner Ted Cuppett. Firm managers were familiar with the self-insurance option because 90% of their clients are in the health care field.

The firm's plan has grown by 10 participants since its switch to self-funding - to 42 - but Cuppett estimates his firm's total health insurance costs this year will be only 4% to 5% higher than they were four years ago.

The firm contracted with a third-party administrator, which receives and reviews all employee claims against the firm's plan. The firm set up a separate health insurance bank account that contains no regular balance. The administrator writes checks to pay claims and sends them to the firm to be signed; the firm then makes deposits into the health insurance account to fund those checks. It's also possible to fund the account in advance of anticipated claims, but Cuppett says the pay-as-you-go method has worked well for his firm.

There is a ceiling on how much the firm can spend. "Under self-funding, you generally buy stop-loss insurance to protect yourself against the very big claim," Cuppett explains. His medical stop-loss excess policy pays all costs above $10,000 per employee and provides an aggregate firm stop loss of $85,000 per year. When this policy comes up for renewal each year, the firm's third-party administrator goes comparison shopping for the best prices.

From the employee standpoint, coverage didn't change at all when the firm began self-funding. Cuppett points out that self-funded plans are subject to Employee Retirement Income Security Act requirements but are exempt from many state mandates. "Although we offer all the items our state requires, there were a lot of things we could have dropped," he says.

"There's a real cash-flow advantage, too," he adds. "If you have an insurance policy, you're funding the insurer's cash flow because they charge you the premium at the beginning of the month, but when do they pay the claim? Two-and-a-half months later. When you first move into a self-funded plan, you don't pay any insurance at all for the first two months because there's no claims process."

The firm has used its own experience as the basis of a new client service. It has teamed with a third-party administrator to offer any entity with nine or more employees a free assessment of self-funding versus current insurance expenses. "It's a nice arrangement because it could generate consulting engagements in which we modify insurance policies," Cuppett says. "The administrator, which performs the analysis, gets to know potential clients. We both could benefit, and I don't have any costs."

Firms interested in self-insurance should turn first to a third-party administrator, Cuppett advises. A good place to look for one is the local yellow pages, according to Jess Buhite of Health Benefit Administrators, a third-party administrator in Forest Hill, Maryland, who suggests searching under "insurance claims processing services." In addition, they are listed in an annual third-party administrator directory issue of the weekly publication Business Insurance.

What they cost. Third-party administrators' administrative fees usually are charged on a per employee per month basis; they collect medical stop-loss insurance premiums in the same manner, Buhite says. "Some organizations charge their fees as a percentage of processed claims," he says, but he believes this method results in excessive charges and should be avoided.

The combination of administrative fees and stop-loss insurance premiums customarily accounts for approximately 30% (12% for the fees and 18% for the insurance) of the overall cost of a self-funded health plan, Buhite says. Claims make up the remainder and are paid only as incurred, which means that in a month with no employee claims, the plan sponsor's only fixed costs are for administrative fees and insurance premiums.

SHIFT THE BURDEN

Asking employees to contribute to benefit costs is another way to lower firm expenses. Chuck Cook, the managing partner of Charles M. Cook & Company in Minneapolis, found a way to freeze health insurance costs at $100 a month for each of his five employees using this method. Ten years ago he decided to pay no more than that amount himself - so he required employees to ante up the remainder for whatever kind of coverage they chose.

For example, one staff member has a basic single policy that costs her $8 per month because the actual cost to Cook is $108; the firm average is about $250 per employee with a family. "The employees make pretty good money," he says. "If you put the onus on them they'll adjust their policies to what they really feel is comfortable and economic." On the other hand, if people are provided policies and can choose low deductibles and copayments, they take less responsibility for managing their own health care costs, Cook believes.

Other firms add on coinsurance or copayments - or even shift all costs to employees - to make them more cost conscious. "You may not like to do it, but it has an impact on costs," Cuppett says. "When people pay out of their own pockets, they are a little less likely to make unnecessary visits to the doctor or the emergency room.

"We insure all employees, but they must buy insurance for dependents through a flexible medical plan using pretax dollars," Cuppett says. "We charge them only $125 per month, which is below our actual cost but we do it so they have to make a knowledgeable decision to buy. We're considering charging $25 a month for their personal insurance because some employees, for example, are covered on a spouse's plan and are overinsured."

LEARN FROM YOUR MISTAKES

Lucy Carter, managing partner of Carter, Young, Lankford & Roach in Goodlettsville, Tennessee, says her 20-person firm made one effort to contain costs that failed. "A few years ago we made a bad decision," she reports. "We had a group policy that was part of a cafeteria plan, so employees could choose to join or not. We found that only the people with the greatest medical problems joined the group while other employees picked cheaper options. As a result, the costs were sky high and the group plan threatened to cancel us."

The firm's new arrangement has resulted in significant savings. "We provide single coverage - coverage for all the employees themselves - and allow them to elect family benefits through a cafeteria plan. We also have a medical reimbursement plan in which employees submit any expense that's not covered but is deductible for tax purposes. Employees each year elect how much they want to spend on health insurance and medical benefits. In my case I set aside $1,200 that goes to reimburse me for eye care, checkups, the deductible on the health insurance" - items not covered by the firm's basic insurance.

"We found it was better for us to provide single coverage for everyone even if we were double insuring in some cases" - because a spouse has coverage, for example. Carter says the change has helped cut premiums by about 40%.

Problems with self-insurance. Another firm was forced to go back to the drawing board when its cost-cutting attempt proved disappointing. Although Doak, Cuppett & Poling is satisfied with a self-funded insurance plan, Whipple and Company, a 50-person firm in Indianapolis, found it to be a bad choice. "It got too expensive," says Vice-President Bill Craigie of the firm's three-year experiment. "Even though we had stop-loss insurance, when we hit that stop loss, it was still more expensive than it would have been had we had a fully insured plan." The major recurring expense proved to be covering childbirth costs for a youthful employee group. "We had a rash of babies," Craigie says.

The firm now offers single through family coverage as part of a preferred provider organization. Employees pay 100% of their benefit costs through the firm's cafeteria plan, to which the firm contributes a base amount for each employee.

Third-party administrator Buhite says self-insurance definitely isn't the answer for all businesses. Firms should have at least 25 enrolled employees: "The bigger the group, the better the savings," he advises. Beyond that, there are no broad guidelines for firms considering self-insurance.

THE RIGHT ANSWER

Health care insurance costs likely will remain an important issue for CPA firms. No single solution will fit every situation. But practitioners who remain informed about the advantages and disadvantages of the many choices available to them will have a better chance of retaining a grip on this burgeoning expense.

What are other firms doing?

To spot trends in health cost management at CPA firms, Laura Inge, technical manager in the American Institute of CPAs practice management division, conducted an informal survey of current and former members of the Institute's management of an accounting practice committee. The results offer a snapshot of what cost-conscious firms are doing.

1. Firm size: Local............................62% Regional.........................37% National..........................2% (Totals 101% due to rounding.)

2. Monthly average health care benefit premium cost per employee:....................$185.87 High:........................$407.00 Low:..........................$65.00

3. Which of the following describes your firm's health care plan?*

Plan type Indemnity plan (group medical insurance.........................72% Preferred provider organization......................48% Health maintenance organization......................27% Point-of-service organization......5% Plan features Prescription drug plan............45% Wellness program...................8% Weight-loss program................2% Other health care plan features mentioned by survey participants are self-funding, partner physicals and a wellness newsletter; 48% had flexible benefit's plans.

4. What changes have you made in the past three years in an effort to lower the cost of providing health care benefits to employees?* Increased deductible...............47% Increased employee contributions......................47% Explained costs to employees.......40% Changed insurance carrier..........38% Increased coinsurance or copayment..........................18% Raised cap on employee coinsurance exposure...............13% Increased use of part-timers and temporary staff................12% Changed to a self-funded insurance plan......................7% Used third-party administrator......3% Other changes mentioned by survey participants: * Added an HMO. * Changed type of plan. * Eliminated dependents. * Used preadmission review. * Added wellness program. * Dropped self-funding. * Added employee assistance program. * Combined HMO and POS. * Increased flat cost for brand-name

prescriptions. * Established a review program. * Offered a managed care program. * Dropped prescription drug card.

5. What is your main consideration when selecting an insurance carrier?* Cost................................68% Plan design.........................46% Customer service....................27% Provider network....................25% Carrier's financial security........15% Cost-control techniques...............8% One participation also mentioned protection for preexisting conditions.

6. How do you keep employees informed of their health care benefits?* Orientation.........................83% Personnel manual....................75% Personal benefits statements........38% Newsletter..........................15% Electronic bulletin board............3% Other methods mentioned: * Periodic handouts. * Periodic memos. * Staff meetings. * Individual contracts. * Annual review. * Open enrollment materials.

* Respondent could choose more than one answer.

ANITA DENNIS is managing editor of the Journal. Ms. Dennis is an employee of the American Institute of CPAs, and her views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.