Rising healthcare costs: searching for a cure; With health insurance premiums rising at double-digit rates, one solution--an option in several new plans--encourages employees to think like consumers of their own healthcare.

It's no surprise that health insurance premium costs have been rising each year, and that the rate of those increases seems to be accelerating. Questions related to containing and managing premiums--especially for private companies--is one of the top subjects for Financial Executives List Exchange for Private Companies (FELIX PC), which is managed by Financial Executives Research Foundation Inc. (FERF). The extent of the increases, however, is alarming.

Results of The Henry J. Kaiser Family Foundation's 2003 Annual Employer Health Benefits Survey, released last September, indicated that health insurance premiums had increased almost 14 percent over 2002, and in both 2002 and 2003, premium increases exceeded the rate of inflation by more than 10 percentage points. Even more alarming is that 2003 marked the seventh straight year of health insurance premium increases, and the third consecutive year of double-digit increases. For some perspective, keep in mind that it takes about seven years or less of annual double-digit increases for costs to double.

The 2003 survey included more than 2,800 randomly selected employers, from public and private, large and small companies, with numbers of employees ranging from three to more than 300,000.

The Kaiser Family Foundation results are amplified by the results of a new Marsh Inc. survey of small and mid-sized employers. Marsh finds that nearly seven in 10 businesses with annual revenues of less than $500 million consider healthcare costs to be their biggest risk issue. However, a majority of these employers believe that the best way to manage these costs is to shift the costs to their employees.

Michael Turpin, a managing director of Marsh Inc. and head of the firm's U.S. employee benefits practices, questions the benefits of this cost-shifting approach. "Employers have been shifting healthcare costs to their employees for more than two decades, with only marginal results in terms of managing the employers' costs. Yet, employers continue to rely on cost-shifting because they may not be aware of better alternatives, such as consumer-driven plans, which give the employees a stake in their healthcare costs, as well as incentives for managing these costs."

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The theory behind consumer-driven health care plans is that employees make better consumer decisions when they become personally responsible for the costs involved. There are several examples of such approaches.

Health Reimbursement Accounts (HRA) feature employer-paid health reimbursement accounts and incentives for employees to be better consumers of healthcare. For example, the employer pays for an HRA account, which could total $750 to $1,500 per year per employee. Employees can then draw on this account for reimbursement of their healthcare costs. Once the account is exhausted, other healthcare costs can be covered by insurance. Unused balances in the accounts can be carried over for use in the next year.

Turpin explains, "By managing their funds in their individual HRA accounts, employees may become more informed consumers of healthcare, which could ultimately translate into lower health insurance costs for their employers. This rise in consumerism could drive collateral benefits of greater transparency and access to information on medical costs and clinical outcomes."

First Dollar Coverage Plans feature the insurance carrier covering most of the employee's healthcare expenses, up to a certain amount. Expenses over that amount are subject to a fairly large deductible, and after that deductible is satisfied, any additional healthcare expenses are covered by some percentage of co-insurance.

This is one of the plans offered by Westminster Manor, a non-profit, continuing care retirement community in Austin, Texas, that is managed by Life Care Services LLC. "We had steadily increasing health insurance premiums for our preferred provider organization (PPO) for a number of years, and we knew that we had to do something to curb these increases," says Tammy Fraser, director of human resources, explaining why a first dollar coverage plan was selected. Moreover, she continues, "Many of our employees were healthy, and did not use their health insurance very much, but we did have some employees who had large medical claims. We decided that we did not want to penalize all of our employees for the larger health care claims experience of a few."

Here is how is Humana's first dollar plan works: Employees are given $500 to use at their discretion for any type of covered medical expense, such as office visits, medical tests and hospital costs. (Prescription drugs, member co-payments and mental health services are not included.) The employee pays a nominal co-pay for each visit or test, and Humana pays the provider directly for the visit or test. After Humana has paid $500 in medical expenses for the employee, any additional expenses are subject to a $1,000 deductible, and after this deductible has been satisfied, other expenses are covered by 80 percent/20 percent co-insurance.

Westminster Manor employees must choose between the traditional PPO and the first dollar plan at the beginning of the plan year. This choice will require them to anticipate their medical expenses for the coming year. Those who expect to have above-average medical expenses over the next year will choose the PPO; others, who think that their medical claims will be less than $500, will choose the first dollar plan.

Fraser says she's been pleased with the results so far. "We have offered both plans for two years now, and they have been a perfect match for us. Thanks to the addition of the first dollar plan, we have been able to keep our health insurance costs down." Except for one employee who encountered some unexpected medical costs, she adds, "we haven't had any other difficulties with the plan."

Defined Contribution (or Cafeteria) Plans such as Grant Thornton's Cafe Plan[SM], are designed to permit the employer to calculate how much it wants to spend each year on benefits for each employee, and convert this cost to a credit. The employer then provides this credit to each eligible employee, who can spend it on various benefit options included in a menu. Employees may add their own additional dollars through payroll deductions.

Eric Parmenter, Grant Thornton's practice leader for compensation and benefit consulting, calls the Cafe Plan[SM] a win-win for both employer and employee. "The employer has a predictable budget for employee benefits, and the employees can custom-design their own benefit plan."

Parmenter explains that there are four filtering mechanisms that increase employee value and help cut unnecessary health care costs:

* A communication and education strategy;

* A health promotion strategy that includes onsite screenings, health and prevention training and online medical decision support;

* An accountable health plan built around the employee's existing doctor relationship;

* An outbound healthcare coaching service.

Health Savings Accounts (HSA) were established by The Medicare Prescription Drug, Improvement and Modernization Act of 2003. This legislation allows employers and employees to make pre-tax contributions into a savings account that is designed specifically for medical costs. Monies not used can be transferred from year to year, and employees who switch jobs can take an HSA with them. Money from the account can even be used tax-free after retirement as long as it is being applied toward eligible medical costs.

HSAs replace Medical Savings Accounts (MSA), a temporary program that had tighter eligibility and contribution restrictions. In order for an HSA to be used, it must be coupled with high-deductible health insurance (with a deductible of at least $1,000 for an individual and $2,000 for families). Due to the fact that the legislation allows for annual contributions of up to 100 percent of the deductible, the higher the deductible, the higher the savings on the insurance premiums.

Jamie L. Amaral, national director of health research and development at the National Federation of Independent Business (NFIB), says that small-business owners can use HSAs to keep their overall health plan spending down, and they can get a tax benefit as well since the money that is contributed to HSAs is not taxed. "The establishment of HSAs by the Medicare legislation in 2003 was a major victory for small business," says Amaral. As an added benefit, she notes, "HSAs promote consumerism by giving individuals more choices for medical services, without the far-reaching restrictions of HMO-type plans. Because HSAs will encourage people to shop and compare the price of the services they buy, they could eventually lower medical costs."

The new types of alternative health insurance plans featured above promote cost savings by encouraging the employee to think like a consumer when incurring medical expenses. These are but a few of the innovative solutions arising out of the need to control the rising costs. There is, indeed, light at the end of the tunnel.

RELATED ARTICLE: 10 Healthcare Cost Drivers

The first five are unique to small businesses, and the remaining five affect large companies as well:

1. Structure. Health insurance industry structure is different for small employers, most of whom use fully insured plans.

2. Small Group Administration and Marketing. Carriers are required to meet each state's unique requirements for plan design, reserves and distribution.

3. Inadequate Competition Among Carriers. High levels of market concentration are common in the state small-group markets. As competition decreases, prices increase.

4. Mandates. Each state decides what medical diagnoses, procedures and drugs must be covered by fully-insured health plans sold within that state. As additional mandates are included within a given policy, the risks associated with the resulting insurance claims are passed on to the plan participants. These apply only to the fully-insured plans used by small groups; self-insured large groups are exempt.

5. Health Insurance Portability and Accountability Act (HIPAA). When Congress passed HIPAA in 1996, many states stopped funding their high-risk pools, assuming that the commercial market would absorb individuals with preexisting conditions; many carriers subsequently left the small group market.

6. Litigation. The cost of malpractice lawsuits has soared in recent years, pushing up insurance premiums and forcing some physicians out of business.

7. Technology and Lack of Uniform Product Standards. The system is fragmented, costly, complex and confusing and lacks meaningful guidelines for technology use. Thus, medical opinions differ by geographic location and practice site.

8. Drug Utilization and Cost. Breakthroughs in pharmaceutical development that have lead to non-invasive cures and improved quality of life are also costly.

9. HIPAA Privacy Regulations. Recently enacted rules will increase costs, which will ultimately be passed on to policyholders.

10. Consumers Do Not Spend Their Own Money. Small business owners would like to share costs and see employees actively involved in selecting the benefits they are willing to pay for.

Source: Jamie L. Amaral, National Director of Health Research and Development, National Federation of Independent Business

William M. Sinnett is Manager of Research for Financial Executives Research Foundation (FERF) and Moderator of Financial Executives List Exchange for Private Companies (FELIX PC). He can be reached at [e-mail].