Articles

Funding Health Insurance Benefits:  Is There A Better Way?

By Joy M. Gänder, CPCU, ARM

Navigating the tumultuous waters of rapidly rising health insurance costs...

WHY ARE HEALTH INSURANCE PREMIUMS INCREASING SO RAPIDLY?

The rate at which health insurance has increased over the years is astounding.  To give some perspective, if the cost of one dozen eggs rose at the same rate as health insurance (since the 1930’s), they would cost $45.83 today, one pound of bacon would cost $69.99 and a pound of butter $58.33!

Despite the tremendous increases, we need to remember that insurance is a financing mechanism.  Insurance companies are the vehicle through which health care providers are paid; premiums come in and payments go out.  In reality then, high health insurance premiums are a symptom of several underlying problems.  These include:

New and Better Technology.  Researchers are continuously improving medical technology, introducing new equipment and developing better tests to determine the cause of disease.  While these are worthy efforts, the enhancements come with a price tag and contribute to the rising cost of health care.

Broader Benefits.  Whether requested by society, mandated by the government or offered by the medical community, today’s health insurance policies cover more claims and treatments than ever before.  Prescription drug cards and coverage for alternative medicine; i.e., acupuncture, homeopathic, and chiropractic treatment, were not always covered by health insurance policies.  The cost to fund the broader scope of health benefits adds to insurance premiums.

Sense of Entitlement.  We all expect to have health insurance, and that is not an unreasonable expectation.  However, in general, society has come to expect that we should, and can, feel good all of the time … regardless of the cost! 

Disconnect.  The cost of consuming health care has rarely been an issue because consumers are isolated from knowing its true costs.  We pay, for example, 25 percent of our health insurance premium, $10 office co-pay and $15 drug co-pay, and we are on our way.  We fail to realize the office visit actually costs $272 and the 30-day supply of drugs costs $295! 

Consumers have little information about the true cost of health care.  Here is an analogy to which we in Wisconsin can relate.  If you go to two weddings, one with an open bar, and the other with a cash bar, at which wedding will more money be spent on alcohol (presume that the same guests attend each wedding)?  Without a doubt, the open bar will have the higher liquor bill, and that’s because the guests are not paying for drinks with their own money, and don’t know how much each drink costs.  In order to address this disconnect, health care consumers need to understand the true costs.

Prescription Drugs.  More drugs are available than ever before and there is no end in sight to new drug development efforts.  If your health plan offers a drug card, you can bet that pharmaceutical company research and development expenses will be passed on to consumers, as well as the drugs’ direct costs, in the form of higher insurance premiums. 

SOLUTIONS

Addressing the problem of high health insurance premiums comes in the form of both short- and long-term solutions.

Short-Term Solutions

    1.  Cost Shifting

·        Increase employees’ share of the health insurance premium, increase dollar co-pays or change to percentage co-pays (i.e., ten percent of the prescription drug cost versus $10).

·        Add a “surcharge” to the health insurance premiums of employees engaged in habits known to increase the use of health care, such as smoking.  In order to avoid discrimination-related problems, be sure to talk with an employee benefits professional before implementing this kind of program.

     2.  Make Flexible Spending Accounts (FSA) Available to Employees

This is a win/win proposition, and should be considered regardless of health insurance premium issues.  FSAs allow employees to pay certain expenses with pre-tax dollars, such as health insurance premiums, co-pays, unreimbursed medical expenses, and dependent care.  The benefit to employers is that these pre-tax dollars are not subject to typical employment taxes.  In other words, you help your employees pay additional expenses associated with cost shifting and you save in employment taxes.  Even after taking into consideration the administrative costs of FSAs, employers will save about five percent of FSA contributions in reduced FICA taxes. 

Long-Term Solutions

The concepts discussed below represent a shift in how health insurance benefits are provided and funded.

    1.   Health Savings Accounts (HSAs)

HSAs have been available for some time, but few have been implemented relative to the number of employers offering health insurance.  Many employers and employees are not ready, literally, or prepared mentally to participate in health insurance to this extent.   

An HSA is an individual account in which employees accumulate money to pay for eligible medical and health care expenses for themselves, spouses, and dependents.  They are established in conjunction with a high deductible health plan (HDHP).  For 2007, the minimum HSA deductibles are $1,100 and $2,200 for single and family coverage, respectively.  The accounts are funded primarily by employers, but can be funded by employees, as well.  Since employees own the accounts, they are deemed portable and go with the employee when they leave.

HSAs attempt to achieve at least two objectives:

·        Employers hedge their financial risk by hoping the premium savings associated with the HDHP will be greater than the total amount the employer contributes to employees’ accounts.

·        If the amount contributed to each employees’ account is less than the Plan’s maximum out of pocket amount, the employee may have to pay funds from his/her pocket to pay claims.  This may encourage more informed health care consumption habits.

In addition to funding future health care expenses and premiums, HSAs are an excellent way to supplement a company’s pension benefits.

    2.   Health Reimbursement Accounts (HRAs)

Like HSAs, HRAs have been available for a few years and are just now catching on with employers.  HRAs are usually implemented in conjunction with HDHPs.  Employers fund a portion of the individual or family deductible excess of the deductible levels of the prior year.

Employers offering an HRA are attempting to achieve the same objectives as those discussed above for HSAs.  The biggest difference between an HRA and an HSA are who owns the accounts and who can fund them.

HRAs can be structured is many ways and employers have tremendous flexibility is deciding how much to contribute to each employees’ account each year, whether unused balances rollover to the next year, etc.  For some employers, HRAs are appealing because the deductible accounts are not portable; if an employee leaves the company, the unused deductible account reverts back to the employer.

    3.   Defined Contribution Health Plans

The concept is simple and similar to the one for defined contribution pension plans.  Instead of buying a group health insurance policy, where the benefits and coverage are known, i.e., defined benefit, employers give employees vouchers and instruct them to purchase their own health insurance using the voucher funds.  This concept allows employers to set and control the amount of their financial participation in offering health insurance, and employees become educated, and therefore, more responsible (hopefully) in purchasing and consuming health care.  This idea attempts to directly address the disconnect problem discussed earlier.

The reality is that most employees are not well equipped to make an informed health insurance purchasing decision.  As it turns out, most employers offering “defined contribution” plans are still involved with securing health insurance for their employees.  Typically, they select a few plans, and then allow employees to elect the plan that best meets their needs.  If the premium for such a plan exceeds the voucher amount, the employees make up the difference.

What About Other Solutions?

In addition to managing higher premiums by changing program structures, reality states the more claim dollars spent, the more premiums will increase.  Here are three ideas to battle higher claim costs and ultimately, higher premiums:

1.       Wellness Plans – These plans attempt to help people change unhealthy habits and lifestyles, which may increase their use of the health care system, thereby driving claim costs up.

2.       Disability Management – The old 80/20 (or sometimes 90/10) rule applies in health care as well: 80% of the costs are incurred by 20% of all users.  Many of these people live with chronic diseases, such as heart disease, asthma, depression, diabetes, etc.  Failure to manage these ailments increases the costs to treat them. 

3.       Arm Employees with Information – If your employees have a choice in selecting providers, clinics or hospitals, facilitate their access to quality of care information.  Like Consumer Reports, health care facilities often publish success and recovery rates for certain procedures.  The presumption is the higher the success rate, the lower the overall claim costs.  

CONCLUSION

Nearly every employer faces the challenge of dealing with increasing health insurance premiums.  For now, some are electing short-terms solutions, while others for whom the problem is extreme, are adopting alternative program structures.  These options allow them to continue to offer health insurance benefits, at least for now.   

Please contact Joy M. Gänder with questions about your employee benefits programs and how certain changes may be right for you and your employees.   Joy can be reached at gander@ganderconsulting.com or (608) 286-0286.