How to choose a health plan.

As the federal government considers mandating that all business owners provide healthcare coverage for their employees, thousands of small business people throughout Southern California are facing a new challenge: selecting the right health plan.

Shopping for health benefits coverage for your company should be approached as you would approach any other major purchase decision for your firm. Obtain good advice from experienced professionals, become aware of and consider new innovations in the marketplace and take a long-term perspective to buying valuable health coverage from a stable and reputable firm committed to doing business with companies such as yours.

As recently as 20 years ago, choosing a health plan was pretty simple. Kaiser was available and most employers offered a Blue Cross or indemnity-type insurance plan with a $100 to $200 annual deductible and 80 percent coverage.

But soaring costs and wholesale changes have revolutionized the health insurance industry in the past 10 years. Employers today must understand the new plans that have evolved and the acronyms that describe them before deciding on a health plan.

Today's options range from Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs) to combinations of the two and traditional health plans.

PPOs are similar to traditional health insurance plans in that there is an annual deductible and the plan pays a stated percentage beyond the deductible. There usually is a waiting period for pre-existing conditions and some services may not be covered or may be subject to reduced benefit levels. PPOs incorporate requirements designed to reduce costs, including reviews of the necessity of hospitalization and some other services.

They also include incentives to the enrollee to use designated providers, listed in a directory, who have agreed to discount their fees and cooperate with review procedures. These are known as "preferred" or "participating" providers.

When a preferred provider is used, a higher level of benefits is paid (for example, 90 percent vs. 70 percent). Importantly, preferred providers "accept assignment," meaning that the enrollee is not responsible for the additional cost in the event the provider's fee exceeds the negotiated rate with the insurer. PPOs provide significant freedom in selecting physicians and hospitals.

PPOs cover services by any provider, including those who are not participating, but at lower benefit levels. Due to the cost savings available as a result of provider discounts and utilization review, PPO-type plans have virtually replaced traditional health insurance coverage, especially in Southern California.

However, premiums for PPO plans are generally higher than for HMO plans. HMOs have grown dramatically in the past decade and play an important part in most employers' health benefit plans. HMO enrollment in the U.S. has more than tripled in the last decade. In California, more than 9 million people, representing over 30 percent of the state's population, are enrolled in HMOs.

While Kaiser Health Plan is by far the largest HMO, dozens of other HMO plans have grown rapidly in the last decade. Most of these newer plans offer enrollees the choice of using independent doctors and doctor groups along with leading community hospitals. Many of these plans actively sell to employers with three or fewer employees.

HMOs offer several advantages over PPO-type insurance plans, including:

* no deductibles

* fixed costs for office visits to the doctor.

* preventive services 

* maternity coverage

* no pre-existing condition exclusions.

* premiums that are 20 percent to 40 percent lower than for PPO plans.

Expanded benefits and low cost result from attention by the HMO and participating physicians to providing only services which are medically necessary. In addition, HMOs control hospital and physician costs either by owning hospitals and employing doctors or as a result of deeply discounted negotiated rates.

While offering advantages in terms of cost and coverage, HMOs do involve restrictions on the selection of doctors and hospitals. Generally, HMO members must select a primary care physician or physician group that provides most services and is responsible for authorizing referrals for care by specialists.

The requirement that the primary care physician be seen first may be disturbing for individuals who wish to consult a specialist even though their problem can be cared for by the primary care physician. Or the patient may value a relationship with a particular doctor who doesn't participate in the HMO.

Exploring health benefit alternatives and selecting the best value requires familiarity with the rapidly changing field of benefits brokerage. More than 90 percent of all employers use the services of a broker of benefits consultant to help choose health benefit options.

Businesses should select a broker who is familiar with group health benefits and who is experienced in helping similarly sized firms with their health benefits decisions. Look for someone who works with a number of carriers, including both PPO and HMO plans. Often it may be necessary to select someone to serve your health benefits needs other than the broker or agent who services your personal or other business insurance needs.

An important step is deciding whether to offer your employees an HMO plan, a PPO plan, or both.

This decision will largely be based on your budget, the number of employees in your firm and the expectation of your employees based on the plans you have offered previously. PPOs offer greater freedom of choice but are more expensive and have more rapidly rising premium rates than most HMOs. Also, there are higher out-of-pocket expenses for employees with PPOs.

Lower cost and comprehensive benefits make HMOs an increasingly popular option. However, the perspective of employees concerned about their freedom to choose any physician must be weighed against the cost advantages for the employer and other employees.

The optimum solution is certainly to be able to offer employees the choice between an HMO and a PPO plan. However, for employees with less than 15-25 employees this is becoming increasingly difficult due to cost reasons and the unwillingness of PPO insurance companies to insure only part of a small employer group.

In situations where a key employee may object to the HMO due to an existing relationship with a doctor who does not participate in an HMO, it may be less expensive to pay out-of-pocket for minor services from that provider rather than having the employer and all employees pay higher PPO premiums and deductibles.

Another alternative is a "Point of Service" or "Open-Ended HMO." These are offered by some HMOs and insurers who, for an additional premium, will cover some services from out-of-plan providers for a higher out-of-pocket cost.

Another important consideration in shopping for a health plan is to avoid the temptation to shop the lowest price each time a health benefits plan comes up for renewal. As with all types of insurance, the selection of a health benefits plan requires a long-term perspective.

Continued availability of coverage from an established company at a competitive price, without exorbitant rate increases, should be the primary objective. In evaluating alternative HMO or PPO plans and their premiums, several important questions should be asked:

* Is it licensed in and regulated by the State of California?

* Is the company financially stable and how long has it offered coverage to firms of similar size in your area?

* How long is the initial rate good for? (Look for a company whose rates are good for 12 months).

* Does the initial rate represent a teaser rate which will increase significantly at the end of the initial term?

* How are renewal rates determined? Are they based on the group's experience (a very risky situation for a small business) or on a pool of similarly sized groups? (Look for a company which publishes its fates for small groups and offers the same rates to renewing small groups as are offered to new groups. Ask about the premium rate history for groups of similar size who have been covered by the carrier for two or more years.

* After the initial term, is the coverage automatically renewable? If not, under what conditions can coverage be terminated? Is there a minimum number of employees who must continue to participate in the plan? What happens if the number falls below that level?

Dozens of insurance companies market PPO products in Southern California. In contrast to HMOs, their benefits vary widely. In assessing PPO plans:

* Review the directory that lists the preferred doctors and hospitals. Does it include a reasonable number of providers conveniently located where your employees live and work? What is the difference in benefits between using participating and non-participating providers? (Larger differences result in significant premium savings and can help contain costs and future premium increases).

* If employees use non-participating doctors, find out how the "customary and reasonable" charge is determined. What is the allowed amount for commonly performed procedures and how does that compare to what doctors charge in your area? (Many low-premium plans reimburse based on fee schedules that are unrealistic, requiring the enrollee to pay a substantial part of the bill in excess of the allowed amount).

* Review the descriptions of benefits, exclusions and prior authorization requirements which will be distributed to your employees. Are their exclusions reasonable? Are they understandable by an average person? Are they available in Spanish for your Spanish-speaking employees?

The benefit plans offered by various HMOs are quite similar to one another and differences between plans are less significant than between various PPO plans.

Basically, the choice in benefits comes down to the co-payment level for office visits and how much the employee pays, if anything, for hospital care. However, the fact that enrollees are locked in and must use their HMO primary care physician and other HMO providers requires a more careful evaluation of providers than for a PPO plan.

Additional factors to evaluate when considering an HMO:

* Review the HMO provider directory. Are the physicians and hospitals used by the plan conveniently located for your employees and their families? If any of your employees live a long distance from work, look at the availability of providers where they live. Carefully review and understand the HMOs requirements with respect to selection of the primary care physician or medical group by your employees.

* Can members of the same family choose different doctors or different medical groups? Can doctors be changed if you wish to do so? How often, with how much notice and for what reason can physicians be changed?

If you follow these important steps, you will be going a long way toward providing the best health benefits for your employees at a cost your business can afford. Choosing a plan is a complicated task involving hours of work, but it's an essential chore for any small business wanting to contain costs and preserve its financial health.

--Arthur Southam, M.D. is the President and Chief Executive Officer of CareAmerica Health Plans.