Cover Story
By Kevin Brafford
The
members of NCCBI’s Small Business Advisory Board squirmed
uneasily in their chairs, and it wasn’t just because the seats
lacked padding. Within the hour they’d be sharing handshakes, smiles
and stories while enjoying lunch during the association’s 60th
annual convention.
At this moment, however, they were all business, with grimaces instead
of grins on their faces. The topic at the March 20 meeting was rising
healthcare costs, and the initial assessment from guest speaker Paul
Barringer, a Raleigh attorney with extensive healthcare law and policy
experience, conveyed news that was neither good nor surprising.
Barringer confirmed what already had been widely reported: health
insurance premiums are likely to rise for some employers as much as 20
percent in 2002. He added that healthcare costs nationally, estimated
today at $1.3 trillion, are expected to more than double by 2011, and
that within eight years health benefits may account for 40 percent of
a typical employee’s total compensation.
“The bottom line is that healthcare costs are increasing and it’s
a trend that’s unlikely to abate soon,” Barringer tells the group.
Employers who provide
health benefits, regardless of their company’s size, are thus faced
with two options. They can absorb the rising costs themselves at the
expense of their bottom lines, or they can utilize a growing number of
strategies that their forward-thinking peers are implementing in an
attempt to control costs.
Solutions these aren’t. Certainly sensible, probably effective and
perhaps necessary steps to protect your business they are. As Steve
Zaytoun, a Cary insurance broker, puts it, “Employers have to
proactive. I don’t see a light at the end of the tunnel, except for
the one of an oncoming train.”
There is perhaps no more hot button, work-related issue that ties
employers to their employees than health benefits. It first attracted
the attention of Barringer, now an attorney with Smith, Anderson,
Blount, Dorsett, Mitchell & Jernigan, a dozen years ago.
“Healthcare has ramifications across society,” he says. “It
impacts everyone. And we spend more on it than any country in the
world, yet one in seven (people) still lack adequate health
insurance.”
Employers seeking to contain rising health care costs do have a
variety of options. What follows, courtesy of Barringer, are some of
the chief strategies that some employers have implemented:
Increase the employee’s share of health costs. A recent study
compiled by Watson Wyatt Worldwide reveals that nearly 70 percent of
employers plan to pass on at least a portion of their healthcare cost
increases to their workers. This can take several forms:
 Require employees to pay a greater share of health insurance
premiums. To a considerable degree consumers have not experienced the
full brunt of cost increases in recent years as employers — facing a
tight labor market — have been willing to pay a disproportionate
share of premium increases. The country’s slowing economy and
lagging corporate profits are making employers less likely to continue
to shoulder increased costs. Employers are also more willing to
increase the employee’s share of health insurance premiums.
Unfortunately, increasing the premium share for which employees are
responsible makes coverage more expensive and may lead some to decline
coverage. This could worsen the uninsured rate in the country as a
whole, as it helped to do in the early 1990s.
Raise employee co-payments — or create tiered co-payment
systems.
Increasing co-payments shifts a greater portion of the cost of a given
service to employees, and also makes employees more mindful of the
cost of services. Employers already have shifted a greater share of
pharmaceutical costs to consumers, particularly by creating so-called
three-tiered benefit plans under which employees pay the lowest co-pay
for generic drugs, a higher co-pay for brand-name products on the
plan’s formulary, and the highest co-pay for non-formulary drugs.
According to a recent survey, 36 percent of employers were expected to
have offered a three-tiered prescription plan in 2001 — up from 29
percent in 2000.
Increase employee
deductibles. As with raising the level of required
co-payments, raising the deductible that each employee must pay shifts
a greater portion of the cost of a given service to employees. In
particular, some employers are raising the deductible that employees
pay when they see a provider who is not part of the Preferred Provider
Organization (PPO) plan network. However, many analysts argue that
higher deductibles do little to make employees more mindful of the
cost of services once their deductible has been met. This is
especially true for high utilizers of healthcare services.
Restrict access to certain health
benefits. A clear way for employers
to control the amount spent for health benefits is to restrict access
to covered services. Pharmaceutical costs may be particularly targeted
in this respect. For example, many companies are encouraging the use
of mail order pharmacies rather than local pharmacies to get better
prices for prescription drugs. Also, many employer-sponsored plans
routinely charge more for, or refuse to cover, drugs that they
determine are used for “lifestyle” conditions such as hair loss or
sexual dysfunction. While limiting access is appealing to employers,
less than 15 percent, according to the above-cited Watson Wyatt
Worldwide study, currently plan to reduce or eliminate coverage for
specified services. Companies are generally reluctant to cut services
for fear of alienating employees or incurring legal liability. For
example, the Equal Employment Opportunity Commission (EEOC) recently
issued a decision that an employer-sponsored insurance plan covering
Viagra for men must include contraceptives for women on an equal
basis.
Curtail benefits to
retirees. Companies whose retiree health coverage
is not collectively bargained can change health benefits for retirees
because such retirement benefits — unlike pension benefits —
generally do not guarantee a specific contribution to health insurance
premiums by the employer. According to the Kaiser Family Foundation
2001 Annual Survey of Employer Health Benefits, only about a third of
firms with 200 or more workers offered retiree health coverage in 2001
— down from two-thirds in 1988.
These Strategies Also Help
Limiting benefits and increasing costs for employees are certain to be
measures adopted by many employers. However, the degree to which these
measures can control employer healthcare costs without compromising
clinical outcomes is unclear. In addition, many analysts believe there
is a limit to the amount of costs that can be shifted to employees.
Cost-shifting measures can also have adverse effects on the entire
company, particularly in regard to attracting and retaining talented
employees in the long term. Because the approaches described above may
have disadvantages, many employers are exploring other kinds of
strategies to control rising healthcare costs. Such strategies range
from efforts to improve the efficiency of purchasing or administering
healthcare benefits to a fundamental revamping of traditional employee
benefits. Here, according to Barringer, are some of these strategies:
Purchase actively. Many companies are using their market power to gain
a greater advantage in negotiations with health plans. Large companies
in particular are aggressively contracting with health plan carriers
by using a request-for-proposal competitive bidding process. According
to a 2001 National Health Care Purchasing Institute (NHCPI) survey, 60
percent of survey respondents have renegotiated all or nearly all of
their contracts for healthcare services within the past five years. In
addition, 75 percent have contracted with providers on a risk-sharing
basis with performance guarantees.
Integrate benefits. An estimated 73 percent of health costs in the
U.S. is generated by just 10 percent of the population — people with
complex and expensive healthcare needs. Also, chronic employee
absenteeism due to such conditions is very expensive for employers. In
recognition of these facts, employers are exploring new ways to
integrate and coordinate the various employee health-related benefits
that they offer. In particular, a number of companies have explored
integration efforts that link the company’s pharmacy benefit with
disease management programs to target employees with certain
conditions. A number of companies also have found that integrating
health and disability benefits can help control the adverse economic
consequences of disability-related absences while improving employee
health, boosting productivity and increasing employee satisfaction.
Shift to “e-benefits.” Many companies have found that providing
benefits information online can streamline many aspects of benefits
administration and reduce costs. It appears that employers are
particularly interested in interactive functions that encourage
employee self-service — such as facilitating account tracking and
price comparisons for health services and procedures. Employers also
are interested in web-enabled functions that enhance flexible spending
account participation and use. By shifting these services to the
Internet, employers expect to trim administrative overhead tied to
benefits administration while simultaneously empowering consumers to
take an active role in managing their benefits information. Early
reports suggest a favorable acceptance from employees who generally
like the convenience of being able to access such information from the
web. The challenge for employers? It’s to make employees comfortable
with using the web as perhaps the primary source of benefits-related
information.
Adopt innovative health/wellness management
programs. Some companies
have created incentive-oriented systems to encourage employees to
engage in regular physical exercise. Others offer access to
web-enabled self-diagnosis tools that may help employees avoid a trip
to the doctor. Such self-service wellness plans alone will not resolve
the problems of rising healthcare costs, of course. They can be
effective, however, when targeted toward lifestyle factors such as
smoking or a lack of exercise that are directly related to many
chronic conditions, which escalate costs.
Consumer education about healthcare
costs.
Although to date employers have not committed significant
resources to educating their employees about the impact of rising
healthcare costs, they should, suggests Barringer. “Consumers are
not price-sensitive,” says Barringer. “They don’t generally
realize how much healthcare services actually cost, and they’re not
aware of how much time and money employers put into their healthcare.
They also don’t realize how much of their own money is at stake.”
Barringer believes that employers would be smart to devote more
attention to educating their employees about the cost of healthcare,
the value of the health benefits they receive (and their financial
stake in these benefits), and the need for consuming healthcare
services cost-effectively. “A more educated consumer is likely to be
a more cost-effective consumer. Employers have a great opportunity
here to impact the cost of health benefits,” says Barringer.
What’s on the Horizon
What may be one of the best plans of all for employers isn’t yet
available in North Carolina. Called “defined contribution” health
benefit plans, they typically involve giving the worker a fixed amount
of money to use to purchase an individual health insurance plan of his
or her choice. According to Paul Mahoney, executive director of the
North Carolina Association of Health Plans, this option is in the
formative stages in the state and remains at least a year away.
Defined contribution health plans are based on the theory that putting
the individual in charge of key decisions gives the consumer more
choice, control and flexibility. Proponents of defined contribution
health benefits contend that these plans can empower consumers to make
sensible and appropriate decisions about what healthcare services to
use.
Employers like defined contribution health benefit plans for several
reasons, Barringer says. First, such plans can eliminate the need for
choosing and administering health plans. Second, these plans can
provide the employer a greater degree of protection against
insurance-related litigation. Third, with expenses per individual
capped at the contribution level, employers like defined contribution
arrangements because they can determine — in advance — how much
they will spend for health benefits in a given time period, and
predict with greater certainty what their future expenditures will be.
Critics argue that employers have latched onto the concept of defined
contribution simply as a means to minimize their responsibilities
toward their employees. And there are concerns about whether companies
will have the sufficient human resources personnel to provide
education and information about the options, and whether blue-collar
workers will feel comfortable making such important, potentially
long-term decisions. In addition, current tax laws provide
disincentives for employers to use a defined contribution approach and
may penalize employees who receive direct contributions from them.
Still, in the longer term, companies that actively manage the choice
of plans available, negotiate group rates and quality standards for
employees, and provide enough money to each worker to cover the cost
of at least one basic plan may be in a position to capitalize on
defined contribution health benefits when they’re approved in North
Carolina. Barringer notes that defined contribution products are
currently available in Washington state, Utah, and Idaho, among other
states.
So why hasn’t defined contribution caught on in North Carolina?
Among other reasons, few employers want to be the first to try a new
concept, suggests Barringer. And the state’s relatively low jobless
rate has made employers reluctant to alter health benefits in a way so
fundamental that it might provoke employees to seek other employment.
HMOs Evolve to Survive
Like most of us, Chuck Harriss dreams of a perfect world. The owner of
Fisher Harriss Development Co. in Salisbury has just four employees,
so he doesn’t experience all of the heath insurance headaches on a
daily basis that larger company owners do.
But he’s insistent that the current system is failing and believes
billionaire Steve Forbes has provided the answer: change the federal
tax code that allows employers but not employees to readily deduct
healthcare expenses. As is, consumers’ unreimbursed medical expenses
must exceed 7 1/2 percent of their income before deductions can be
taken.
“If I was king, two years from now we’ll have rewritten the
federal tax code, and we’ll have gone from corporate health
insurance to private health insurance,” Harriss says. “I think
that medical care is personal. Your boss doesn’t tell you which
church to go to or what groceries to buy, so where’s the difference?
“I’ve heard that 70 to 80 percent of all healthcare money is spent
in the last six months of life. Healthcare is private, and those
decisions should be left up to the individual.”
He also believes that the current system creates handcuffs on
entrepreneurs. “My wife had to keep working when I went to start my
own company,” he says, “because we couldn’t afford the health
insurance. If we can’t encourage small companies, everyone
suffers.”
Harriss realizes that his perfect world isn’t so perfect, that jobs
would be lost if only private insurers existed and that a complete
disconnection between employers and employees over healthcare would
cause unrest. But such has befallen the fate of other proposed
solutions. In the early 1990s, President Clinton pushed HMOs as the
answer to healthcare reform. But the popularity of HMOs diminished
because they offered a limited choice of doctors and wouldn’t allow
patients to see specialists without a primary care doctor’s
approval. Nearly every step of treatment was evaluated and rumors
persisted that the “gameplans” of HMOs were to deny patients’
claims and appeals until they were too worn down to fight.
Employers responded. By the mid-1990s, companies began flocking to
plans with a wider choice of doctors and hospitals. HMO enrollment
began to drop and today the most popular HMO alternatives — PPOs and
Point-of-Service (POS) plans — cover a far larger share of people
with health insurance.
This doesn’t mean that HMOs are dead. To the contrary, the advantage
might shift back to that platform as healthcare costs continue to
rise. “We have a bulge of baby-boomers that are coming through the
system,” Barringer says. “And technology isn’t cheap. We have a
market system that awards technological innovation, but that comes at
a price which we all pay for.”
“Utilization is at an all-time high,” adds Zaytoun. “The plans
that are in place now encourage you to go see your doctor. For
example, if I have a headache that persists for a couple of days, I
might go see my doctor because I only have a $25 co-pay. Now my doctor
might not know whether I just have a headache or a brain tumor, so
he’ll run a CAT scan to find out. So now you’re looking at a huge
cost.
“But if my plan is different, and say I have a $500 deductible, I
might stay home, take some aspirin and wait it out for a couple of
days, thinking I’ll get better. At least I hope I’ll get
better.”
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