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Controlling health insurance costs.

The average annual cost increases for providing health insurance to a company's employees are enough to give any business owner a heart attack. In 1991, for the first time in three years, the average increase for company health insurance premiums was under 20 percent, according to a nationwide study by A. Foster Higgins & Co., a benefits consulting firm based in New York. Unfortunately, this lower rise reflected not lower costs, but the decision of more companies to shift a greater share of payment responsibility to employees.

John Magnuson, CPM |R~, of Magnuson Management, Inc., a firm with about 180 employees in Tacoma, Washington, reports facing a 39-percent increase for his company's health insurance in 1993. That was the equivalent of a salaried staff person. In this kind of environment, he states, "you have no choice but to cut everybody back, or cut someone out."

Almost everyone agrees that an overhaul of the health-care system is long overdue, but almost no one agrees on how to carry it out. While policymakers are grappling with proposals for change, small businesses have to find ways of reducing their premiums--before cost increases wipe out their profits.

Controlling health-care costs can be harsh medicine, but if you find the right prescription for your company's needs, you can get results.

The universal antidote: Finding a good broker

All evidence about rate increases aside, business owners should not dismiss the possibility of getting a deal that is better than their current policy.

The first step towards exploring all your options is to hire a broker familiar with the market and willing to go the extra mile to find the most appropriate policy. A well-known insurance broker with a large clientele commands the attention of the insurance industry in a way a small management firm with 25 employees cannot.

Robert A. Murray, CPM, president of RCP Management Company, Princeton, New Jersey, recommends shopping the insurers every year. His technique is to ask his agent for an estimate of the next year's premium increase three to four months in advance of policy renewal. "Frankly," he states, "if it's a 14-percent increase, which I'm expecting again this year, I can live with that. With anything higher, I get nervous and go shopping."

That means going to an outside broker with inside knowledge of the options. However, Thom Freismuth, president of San Diego's Financial Advisory Services, a benefits consulting firm, cautions that you should check your broker's credentials.

"A lot of people assume that anyone can sell health insurance--the fire and casualty agent, the life insurance agent--and often they can," he says. "If you can sell an individual health insurance policy or disability policy, that same license allows you to sell to a 20,000-member group."

To make sure you work with someone who has sufficient expertise, however, find out if health insurance is a major part of the broker's business, and get references from the broker's clients.

Ask the insurance broker to evaluate your program, including your cost-control measures and objectives for the kinds of benefits you want to provide. Think about whether or not you should change your benefit objectives. If your business has gone from flush cash flow to survival mode, your health-care objectives will obviously be different. Ask what strategies the broker can suggest for decreasing your premiums.

Prescription one: Providing a benefit tradeoff

The most obvious way to reduce a company's costs is to limit employee benefits. Magnuson, for example, cut the firm's expected 39-percent increase to 15 percent by increasing the deductible from $250 to $500 and asking the employees to make a $10-per-month contribution to their premiums.

Rebecca Chapman, comptroller for Mathews-Click-Bauman, Inc., reduced a drastic premium increase by employing similar strategies, as well as increasing the eligibility requirement from 30 full days of employment to 90 days.

Reducing costs by limiting some benefits does not necessarily mean changing only one side of the benefits equation. If you look carefully at what the company provides, you can often find ways to add some benefits, cut others, and end with net savings as the result. This was the case for Mathews-Click-Bauman, which added eye-care coverage and still cut costs.

With an increased deductible, you can add a benefit such as dental care, eye care, or life insurance. The exception is a prescription card, which impacts heavily on premiums because prescription drugs make up the fastest increasing segment of health-care costs.

Larry Devitt, senior sales representative for The Travelers Insurance Co., cautions employers about prescription cards as an option: "Once you put in a prescription card," he states, "it is very difficult to remove. Employees do not want to give it up."

Murray's experience directly supports this contention. He made the decision to cut the card from the company's benefit package strictly because of its cost. "We were going to face a 28-percent increase in premiums," he states, "and by making some adjustments--a higher deductible, cutting the card, second opinions for surgery, carrier approval for elective hospital admission--I cut it down to a 14-percent increase."

Looking back on employees' reactions, Murray says he should have asked them which benefits they needed most and how they thought they could reduce the costs.

Suggests Freismuth: "You might consider covering prescriptions, but only after a deductible of, for example, $50. After that deductible is reached, you might cover 80 percent of the cost."

Another tactic that works well with drug cards is to institute a $2 co-payment for generic drugs, and a $6 or higher co-payment for brand names. This induces cost-consciousness in employees who use the benefit.

Give something back to employees

Requiring employees to pay a portion of the premium, an increasingly common practice, has an impact. The first way to soften the blow is to set up a Section 125 premium-only plan, or POP. This program, named for the IRS code section that governs it, provides immediate savings both to employees and employers.

Freismuth explains how it works: "Let's say your employees were paying $80 per month toward their health-care premium and you've got to raise it to $110. Without the 125 plan, that $80 was after tax, so maybe they had to earn $110 to cover the cost. Implementation of a 125 plan takes the employee contribution to pre-tax." Having employees contribute $110 in pre-tax dollars allows you to decrease premiums without affecting employees' budgets.

The way the plan works is uncomplicated. The employer withholds an amount equivalent to the employee's premium contribution before deducting any payroll taxes, including FICA. That means that the employer saves money as well: The IRS does not require a FICA contribution on that portion of the employee's pay, and payments for workers' compensation on that amount are also eliminated. Costs for instituting the plan are usually offset by the company's FICA savings.

A premium-only 125 plan also provides significant relief when the employer fully covers each individual employee and elects not to cover dependents.

The next tier of a Section 125 plan is called a flexible spending account. Setting up one of these accounts gives your employees the option of earmarking a specific amount to be deducted from their monthly paychecks before taxes. They can use the money for medical expenses, including dental or eye care, not covered by their insurance. If the employee has dependents and both spouses work, the rules allow a maximum of $5,000 per year in the account towards day care.

If you decide to use a higher deductible or a higher co-pay ratio to decrease the company's health-care expenses, this is the portion of Section 125 that will reduce the impact of employees' out-of-pocket expenses. Anything employees put into a Section 125 account is pre-tax.

Employees should be cautious, however, when they decide how much they want deducted: Any money they do not use on medical expenses by the end of the year goes back to the employer, who is required by law to keep it.

Allowing employees to put in too much money has a danger for employers as well. If, for example, an employee decided on a paycheck deduction of $100 per month towards the account for a total of $1,200 that year, and the employee incurred a $1,200 medical expense in January, the employer would become responsible for paying the full amount, even though the employee had effectively contributed only $100. If the employee left the company on February 1, the employer would have little or no recourse for recovering the funds.

Especially during the first year of a flexible spending account, Thom Freismuth advises employees to put in only what they think is absolutely necessary. "The plans do work well," he says, "you just have to be careful if someone puts in too much money."

Perhaps the most desirable tradeoff you can offer employees is letting them make the decision about which benefits they want. You can do this with a "full cafeteria" plan, which permits employees to chose benefits from a "menu" of options up to a set cost amount.

"The employer might give employees $3,000 per year to use any way they want. Health-Care Plan A, with no deductible and everything covered, might cost $2,800. Health-Care Plan B might have a $500 deductible and only costs $1,800. If you need more life insurance, you buy more life insurance; if you don't think you need any disability insurance, you don't buy any; you could buy vacation days or give up vacation days to buy benefits," explains Freismuth.

The only problem is that administrative expenses usually make the plan advantageous only for employers with 100 workers or more. "You just cannot have enough items on the menu when you're a small employer to make the plan worthwhile," says Freismuth. "But for 100 to 150 people, the savings are probably going to wash out any hard-dollar expenses you have to set it up and administer it."

Obviously, with a cafeteria plan, you should make sure the carrier or broker provides consulting to employees when they make their budgeting decisions.

As with the first two tiers of Section 125, the employer saves the FICA and the workers' compensation costs on every dollar that goes into the plan. The plan may not directly affect health-care costs, but it definitely creates tax savings.

Prescription two: Managed care

Because of its popularity with the current administration, the phrase "managed care" has probably become the most often repeated health-care buzzword of the year. In practical terms for employers, it means choosing a preferred provider organization (PPO) or a health maintenance organization (HMO) to supply health care.

The first option, a PPO, offers more flexibility than the second. Employees receive a booklet of physicians from whom to choose. As with an HMO, costs are lower for service from doctors in the network because they work at pre-negotiated discounts.

One way to motivate employees to try PPO doctors is to cover a higher percentage of the costs (e.g., 90 percent) if the employee sees a doctor from within the network, and a lower percentage (e.g., 80 percent the first year of the plan, 70 percent the next) for using a doctor outside. If employees resist giving up their own doctors, this is one way of easing them into a managed-care arrangement. A higher deductible for non-PPO physicians is also an option.

Managed-care plans offer another advantage: they usually verify the doctors' qualifications for you. "We tend not to question our doctors' malpractice histories, educational backgrounds, or board certifications," states Devitt. "Doctors have to go through scrutiny in order to be part of just about anybody's network."

HMOs are structurally more rigid than PPOs. Participants usually do not have the option of out-of-network care. With an HMO, each employee is assigned a primary-care physician, who must evaluate any problem before the insurance covers a visit with another doctor. If the physician gives the patient a referral to see someone else, then the visit is covered.

This procedure helps achieve large cost savings because the primary-care physician can differentiate between those with serious problems and those who tend to self-diagnose and may not require expensive, specialist care.

To illustrate the savings a managed-care option can provide, Freismuth describes negotiating a plan for a 500-member group: "I asked what it would do to the group's rates if they entered a PPO. The carrier brought the rates down 10 percent in a five-minute phone call."

The cost savings achieved with HMOs also result from the fact that HMOs are community-rated; each group pays the same regardless of its employee composition. This type of rating could result in significant savings for a small company with a limited risk spread, but little or no savings for a large company with a young work force and a good experience rating.

For this reason, you should examine your own cost difference between PPOs and HMOs; joining a PPO may be just as cost-effective as using an HMO.

Prescription three: Alternative funding

Another option for lowering health-care costs is allowing the company to accept some of the risk; in other words, the company self-insures, but only up to a limit.

Full self-insurance is not advisable for any small company or for many larger ones. Most brokers recommend partial self-insurance only after a company has about 150 employees. Devitt explains, "Smaller employers tend to be very volatile. Their loss ratio could be over 100 percent one year, 20 percent the next. Once you get to the 150 mark, the losses are more even."

To partially self-insure, a company generally buys two insurance policies. One, called a specific insurance policy, sets a certain stop-loss per employee. A firm pays any claims for each employee up to that amount. After the employee's claims surpass the stop-loss, the insurance company pays the rest.

When using this option, a company hires a third-party administrator to handle the claims. The administrator receives and adjudicates the claims, and then bills the company whatever it owes. The monthly administration fee is usually minimal, in the range of $8 to $11 per employee per month.

The second insurance policy is called an aggregate policy. This policy sets an aggregate stop-loss for the company, usually 25 percent over the amount the company would pay for full insurance. If total expenses for the year go over the aggregate stop-loss, the company's claim payments stop there, and the insurance company picks up the tab for the rest.

For example, if a company has to pay $100,000 to be fully insured, the aggregate stop-loss for partial self-insurance would be $125,000. In a worst-case scenario, the company would have to pay $125,000 in claims that year.

A company pays a monthly premium for the second policy, which is usually much lower than the premium without the alternative funding plan. Magnuson admits, "It's a calculated risk, but you really reduce the premium, by as much as one-half to two-thirds. What you're doing is paying less premium in the hope that your savings will cover your potential losses in claims."

Walter L. Harrison, a certified financial planner and chartered life underwriter at Bratrud Middleton Financial Services in Tacoma, Washington, adds that the larger the group, the greater the savings and the less potential for everyone in the company to reach the maximum claim limit.

"While you can't get large savings with a smaller group," he states, "you can control the rate increases. When you've got a 20-percent trend of increases, and you get it down to 5 percent or lower, I'd say it's a very successful program."

One disadvantage to partial self-insurance, according to Freismuth, is that for the first year of the plan, expenses will seem to be less than they actually are. This is because claims need about two or three months for processing. When December 31 of the first year arrives, the employer might look at the savings and think the plan exceeded expectations. But after the claims for November and December are paid, the savings may not be as high.

The big risk for any self-insurance program is that the money you save may not cover the amount you pay out in claims. If you save $40,000 in premium payments, for example, but you have to pay out $60,000 in claims, you lose $20,000. You would have been better off if you had taken out full insurance.

Freismuth believes that self-insurance plans work best when the company has a solid experience rating to fall back on. An employer might expect low claims because all the company's workers are healthy and miss few days of work. But the unknown variable is the health risk of the employee's dependents. A premature baby, for example, is currently the biggest average health-care expense there is--in the range of $100,000.

Harrison says that the key element to making this kind of program work is giving employees incentives not to go to the doctor. "Make sure the employees understand who's paying the bills," he says. "Give some kind of reward for not using the medical insurance unless it's absolutely necessary."

An incentive program must include a direct benefit for the employee, not just cost savings for the employer. For example, the company can take the amount of savings after the year's claims are paid and divide all or part of it among employees as a bonus or contribution towards retirement. Anything the employees receive is a direct reward for keeping the claims low.

Also, going to the doctor should cost the employee at least something; a deductible of $200 is sufficient to reduce unnecessary trips to the doctor's office. On the other hand, an up-front benefit with no deductible for preventive-care treatments and tests should also be part of the strategy,

Preventive care, states Harrison, is not a real cost factor in health care. The real problem, he states, is high utilization of a health-care plan just because someone does not know whether or not a visit to the doctor is necessary.

He recommends providing newsletters and books on an ongoing basis to educate employees about what they should do in common situations. "People have got to start understanding that insurance never was designed to take care of the sniffles, hangnails, and diaper rash," he says.

Freismuth would go even further than educational efforts by bringing special preventive-care programs to employees. Some HMOs, he says, give such service at no cost. Other programs charge about $70 per employee for a one-time evaluation. The provider sends a van to the company, along with EKG capabilities, body-fat testing machines, and other equipment. Each employee receives 10 to 15 minutes of tests.

Confidential results go to the home of each employee, with suggestions for changes in lifestyle to improve health, The employer receives an overall report on the company and learns about the health-risk factors among workers--for example, the percentage of employees who smoke.

A less expensive preventive-care option is to institute an employee assistance program. Employees can call an 800 number 24 hours a day to talk about stressful situations. These telephone-only programs usually cost about $3 per employee per month; a more extensive program that includes one or more face-to-face visits with a counselor might cost $8.

"These programs are very inexpensive," states Freismuth. "They give employees the message you really care, and they reduce stress." And reducing stress reduces the potential for health crises.

The disadvantage to these kinds of wellness and preventive-care programs is that the payback is not instant. The long-term advantages, however, are tremendous; someone might avoid a heart attack by cutting down on cholesterol.

Devitt reports that the wellness program instituted by The Travelers has reduced claim charges by twice the cost of the program. The only firms that are beginning to see discounts on their premiums, however, are the ones who have had the program in place for five or six years. If a company partially self-insures, of course, this kind of savings would belong to the company up front.

In summary

Seemingly against all odds, it is possible to control health-insurance costs. The strategy all managers should try is to work with a knowledgeable broker who commands the attention of the market.

The next treatment option is to limit expensive benefits such as prescription cards and provide other options that cost less. Managed care is a big cost-saver that can provide sufficient flexibility to keep employees happy.

Finally, if your firm is large enough, consider partial self-insurance. When employees participate in keeping their claims low, the rewards are more than worth the risk.

Dorothy Walton is a freelance writer based in Chicago. She was previously a developmental book editor with the Institute of Real Estate Management, She has also designed and taught courses in English as a Foreign Language in Madrid.
COPYRIGHT 1993 National Association of Realtors
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Author:Walton, Dorothy
Publication:Journal of Property Management
Date:Jul 1, 1993
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