Cut Your Health Care Costs Now

Nine ways to slash your insurance costs, from health savings accounts to getting tough with your broker to joining purchasing pools.
Inc. Magazine, April 2005
By Jennifer Gill

Mary Sadlier's latest defense against rising health care costs came down to a container of Clorox wipes. Last November, the executive vice president of Advertising Ventures received notice that health care premiums at her firm would jump nearly 19% in 2005. More grim news came two days later: One of the Providence-based company's workers had come down with a nasty case of flu. With the flu vaccine in short supply, Sadlier feared the agency's 24 other employees could easily get sick -- perhaps even require hospitalization -- raising her company's risk profile and triggering another premium hike in 2006. Enter the wipes. With her assistant's help, Sadlier started to clean everything germy in the office, from doorknobs to light switches. If the company could stave off illness, maybe, just maybe, it could deflect higher rates as well. "We had this fear that it could be a long, hard winter," Sadlier says.

Sadlier's ploy may have been unusual, but her predicament isn't. Health care costs have been climbing at double-digit rates for years now -- they were up 11.2% last year, down slightly from a 13.9% jump in 2003. Small companies have been among the hardest hit. In 2004, according to a survey by the Kaiser Family Foundation and the Health Research and Educational Trust, 63% of companies with fewer than 200 employees offered health benefits, down from 68% in 2001. "Small businesses are at the mercy of the insurance industry," says Mila Kofman, a professor at Georgetown University's Health Policy Institute.

How did we reach such a state? Much of the blame goes to the go-go '90s. As the war for talent raged on and unemployment hit record lows, companies beefed up benefits to attract and retain the best people, absorbing the bulk of the costs and offering low, flat copays. Now, in a much more dicey economic environment, businesses are full of workers who think the cost of health care amounts to the $20 copay printed on their plastic ID card. "Between office copays and drug benefits, we've created our own monster: the employee," says Richard Ramsburg, senior account executive at EBD Financial, an independent insurance brokerage in Herndon, Va. "If their friend Joe gets an MRI for a headache, then they need one too. Most people have no sense of the true cost of health care. And it's well in excess of what employers can afford."

Employees running for antibiotics when they get the sniffles, insurance carriers ready to pounce with higher rates as soon as one of your workers gets sick or, in many cases, just reaches the age of 40....Can't a business owner catch a break? Inc. has come up with nine things you can do right now to lower your health care costs -- or, at least, cut the amount of your annual increase. (Busting out the Clorox wipes is not one of them -- though Sadlier reports that while Advertising Ventures has seen a few cases of the sniffles this winter, her office so far has avoided a major flu outbreak.) Admittedly, these tactics are mere Band-Aids that do little to solve the overarching problems facing the health care system. But when you're bleeding, even a Band-Aid can help.

1. Shop around -- even in good years
Feeling relieved that your premiums inched up only a few percentage points? This is not the time to relax, says David Reid, vice president of Unison Benefits Management Inc. in Minnetonka, Minn. "Complacency will cost you a lot of money," Reid says. "Even in years when your rate increase is modest, you should still adopt the same techniques as if you're facing high increases. Competitive proposals yield genuine results."

Exhibit A: One 200-employee firm that Reid advises got hit with a relatively modest 7% hike last year from its insurance carrier. Nonetheless, Reid marketed the firm's plan to other insurers and got quotes that were 10% lower. He took those competitive bids to the client's current carrier, which reduced its increase to 5% -- and managed to hold on to the account. Reid estimates that as many as 90% of his clients renew with the same carrier, often with lower rate increases, after getting bids from other insurers. And if your carrier won't match the competitive bids? Don't be afraid to jump ship -- your peers certainly aren't. According to the Kaiser report, 57% of small businesses shopped for a new plan last year. Of those, 31% switched carriers and 34% changed health plans.

2. Consider health savings accounts
Much has been made of health savings accounts, or HSAs, which were introduced in January 2004 as part of the major Medicare legislation. The accounts are so new that few companies have implemented them. But industry experts expect that number to grow fast. One out of four small companies, according to the Kaiser survey, is very or somewhat likely to provide an HSA plan in the next two years.

A kind of 401(k) for health care costs, HSAs let individuals save money for health care expenses using pretax dollars. Employers offer the accounts in conjunction with a qualified health plan that has a high deductible -- at least $1,000 for single coverage, $2,000 for a family -- and an out-of-pocket maximum that doesn't exceed $5,000 for individuals and $10,000 for families (the deductible counts toward the limit). Both employers and employees can fund an HSA, but the total annual contribution can't be more than the plan deductible. Employers pay the premiums and employees use their own money to cover health-related expenses until the deductible is reached. Then, the health plan kicks in. Unlike flexible spending accounts, HSAs don't have a use-it-or-lose-it rule. Funds that aren't spent in one year roll over to the next. Employees can also take their HSAs with them should they leave a company.

By putting individuals in charge of spending their own money on everyday medical needs while still providing coverage for serious conditions, HSA plans are designed to make people more astute consumers of health care. But opponents worry that some people, particularly low and moderate wage earners, will forgo necessary medical treatment -- leading to more severe conditions and expensive emergency room visits down the line. "If a person's barely making it and suddenly finds himself responsible for a deductible that's a couple of thousand dollars, that's when I worry about him not getting the care he needs," says Elliot Wicks, a senior fellow at the Economic and Social Research Institute in Washington, D.C.

Still, some early adopters of HSA plans report significant cost reductions. Sumer Inc., a manufacturers' representative for semiconductor makers in Rolling Meadows, Ill., switched to an HSA plan with Destiny Health in January 2004. Over the previous four years, the company's premiums had skyrocketed 100% to $162,000 annually, says Sumer's president, Craig Anderson, whose grandfather founded the firm 50 years ago. With the HSA plan, annual costs dropped to $124,000, a savings of 23%. What's more, Anderson says he and his 24 employees secured much better coverage. The company's previous health plan featured a $500 deductible and 80% coverage in network and 60% out of network. The HSA plan has a $1,500 deductible for individuals, $3,750 for families, then 100% coverage in network and 80% out of network. Sumer makes it easier on his staffers by contributing $1,000 a year to an HSA for an individual and $2,500 for families. As a result, an employee with single coverage pays $500 out of pocket if she stays in network -- compared with $500 plus 20% of costs under the old plan.

3. Find a broker who works for you
Selecting the right insurance broker is as important as picking a health plan. Nearly 80% of benefits managers turn to their brokers first when crafting their plans, according to a survey of companies with 10 to 500 workers by Employee Benefit News and Genworth Financial. And 70% say their brokers make or greatly influence the decision of which benefits to offer. A good agent takes the time to get to know your business and understand your financial goals -- as well as your limitations. Your broker also should suggest ways to cut costs and keep you informed of industry news. So here are some questions to ask yourself: In the past year, has your broker discussed recent legislative changes to COBRA? Have you talked about how HIPAA will affect your business? Has your broker explained Section 125 plans, which reduce payroll costs and let employees pay their share of health care premiums with pretax dollars? If not, it's time to shop for a new broker.

Entrepreneurs also should be mindful of how their agents are compensated. Commissions vary depending on the product line and the carrier but typically range from 2.5% to 5% of the annual premium, says Ramsburg, at EBD Financial. In other words, if you've been socked with a 25% increase on a $1 million policy, your broker just scored a nice fat bonus. Make sure he or she is working for that pay.

4. Tweak the finer points of your plan
Sometimes one phone call can lower your rates dramatically. Just ask L. Bart Adams, operations manager at Mountainview Mushrooms, a producer of fresh mushrooms in Fillmore, Utah, with $8 million in annual revenue. Fillmore is a rural community, he says, so the company's 120 workers mainly get medical care from local providers. Why then, he wondered, should the company pay for networks with doctors and hospitals two or three hours away if its employees rarely use them? He called the hospital administrator at the nearby Fillmore Community Medical Center and asked if the facility would be willing to join a more limited provider network affiliated with Mountainview's insurance plan. Done, the administrator told him. His insurer, Regence BlueCross BlueShield, signed off on the change, and Mountainview will reduce its premium increase from 11% to just 6% this year, Adams says.

That's not the only way to modify your coverage. With the cost of hospital care up sharply in recent years, for example, some plans, such as Blue Cross of California and Tufts Health Plan, now offer tiered hospital networks that operate much like the in-network/out-of-network policy for doctors. In such a system, hospitals are assigned a tier based on such factors as cost and quality of care. Cost-sharing varies, depending on the tier -- a copay at a tier-one facility might be $50 a day, for instance, and $150 a day at a tier-two facility. Deductibles and coinsurance can also differ. "All of these arrangements can lower premiums," says Paul Frostin, director of the health research and education program at the Employee Benefit Research Institute, a nonprofit research group in Washington, D.C. A facility with a lower copay isn't necessarily inferior to a more expensive one, Frostin adds. In fact, it may boast lower readmission or complication rates, two factors that can help reduce your overall cost of hospital care.

Then there are the standby modifications, like raising deductibles and copays. According to the Kaiser study, 42% of small firms are very or somewhat likely to boost deductibles this year and 38% expect to raise the amount employees pay for prescription drugs. Another option to consider: Switch from a flat dollar copay on prescriptions to a percentage copay with a minimum/maximum dollar contribution, says Chris Robbins, CEO of Arxcel, a consulting firm in Buffalo that helps employers design prescription benefit plans. Instead of a flat $20 prescription drug copay, for example, an employee would pay, say, $10 or 20% of the price of the prescription, whichever is higher, up to a maximum of $75. Such copays "keep pace with inflation," he says. "The employer doesn't have to be the bad guy and raise the copay year after year."

Are you subsidizing your competitor by paying his employees' health benefits? You might be if you offer medical coverage to your workers' spouses.

5. Careful who you're covering
Are you subsidizing your competitor down the street by paying his employees' health benefits? You might be if you offer medical coverage to employees' spouses. That's why more small businesses are eliminating coverage for spouses and family members if they can get insurance at the spouse's workplace. A business, for example, might require an employee to pay the entire premium for her husband if he is eligible for coverage at his job. Four out of 10 companies in the Kaiser report say they're very or somewhat likely to boost employee contributions for family coverage in the next two years. Clearly, this is not going to make your employees happy. "But it's about survival," says Joe Martingale, national leader for health care strategy at benefits consulting firm Watson Wyatt. "It's certainly better than terminating coverage altogether."

Look at whom you're covering in-house, too. Adams at Mountainview Mushrooms found that annual turnover at his company last year ran about 30%, or 36 people, half of whom left within the first six months. New employees were eligible for benefits after three months, which meant that the business was paying two to three months' worth of premiums for workers who soon left. By extending the probation period to six months, Bart estimates the company will save about 3%, or $8,000, in health care costs this year.

6. Be your own insurer
With a self-insured plan, your company assumes responsibility for the costs of your enrollees' medical claims. In most cases, a self-insured business purchases stop-loss insurance to limit its financial liability to a certain dollar amount in case an employee has a catastrophic claim, such as cancer or an organ transplant. For example, you might have a $45,000 cap on claims per person a year and a $1 million cap on total claims. If you exceed either amount, the stop-loss policy pays the remainder.

The Employee Retirement Income and Security Act, or ERISA, exempts self-insured plans from consumer-protection regulations and state-mandated benefits, which can lower the cost of premiums. Employers also are not required to pay tax on premiums. But before you go and cancel coverage with your insurer, understand that self-insured plans aren't for everyone. A self-insured company spreads the risk of costly claims across its work force. That's a reasonable gamble to take if you have at least 100 workers. Fewer than that, however, and one big claim could break the bank.

That said, self-insurance can result in dramatic savings. Slammed with premium hikes of 20% or more for three years in a row, Quantum Imaging & Therapeutic Associates in Harrisburg, Pa., was shelling out $100,000 a month last year to insure 120 people with two PPO plans and one major medical plan, says Scott Deardorff, the company's accounting manager. Deardorff obtained two years' worth of claims records and discovered that Quantum was paying much more in premiums than the cost of its claims. So last November the company switched to a self-insured plan and sliced its monthly costs to about $65,000, a 35% savings. Its stop-loss insurance kicks in if Quantum exceeds more than $50,000 in claims for a given person, or $1.2 million in total claims, a year. Under the program, employees can choose between a major medical plan and a benefits-rich PPO that has no deductible if they stay in network. Dental and vision coverage are available as well. "We control our deductibles, our office copays, our drug formulary, and we're saving money," says Deardorff.

7. Jump in the pool
There's strength in numbers. Purchasing pools let small companies -- typically those that have fewer than 50 employees -- band together to buy health insurance. The combined purchasing power of the group often translates to better rates and access to plans from a larger number of carriers. "Purchasing pools are on your side," says Georgetown University's Kofman. "They can negotiate the bells and whistles that you may not be able to get on your own."

Some pools, like California's PacAdvantage and New York City's HealthPass, are open to any local employer that meets certain requirements. Others are run by national trade associations or other organizations and are restricted to members only. If you belong to a trade group or chamber of commerce, check to see if it offers health insurance for members. Your insurance broker also should be able to tell you about pools in your state.

The Connecticut Business and Industry Association (CBIA), the nation's largest statewide business organization with more than 10,000 members, launched its purchasing cooperative, Health Connections, in 1995. Today the program insures more than 63,000 people employed by 4,700 small businesses, according to Philip Vogel, the association's senior vice president. The Bushnell Center for the Performing Arts in Hartford joined the pool in 2003 primarily because of rising costs, says Diane Bruno, director of human resources. The nonprofit, which has 50 full-time employees, pays 75% of the premium for the least expensive plan offered by Health Connections. If employees want to upgrade to a richer plan, they pay the difference. That formula helped Bushnell save $30,000 last year.

In 2003, the U.S. House of Representatives passed legislation that would establish "association health plans" to let small businesses join together across state lines to buy health insurance as a group, and President Bush has indicated he will sign the bill if it passes the Senate. Under the current legislation the plans wouldn't have to cover costly state mandates, such as diabetes or infertility coverage, which advocates say would help keep premiums low. Critics point out that the plans would preempt all state consumer protection rules. Another potential hazard: Association health plans would be allowed to self-insure. In the past, notes Kofman, some self-insured plans run by business coalitions have become insolvent, putting members on the hook to pay claims. "That could put a small business out of business," she says.

As with all changes to your health insurance, do plenty of homework before joining a pool. Make sure more than one insurance company participates and that the program negotiates over benefits and rates. Find out if the program will intervene on your behalf if you run into problems with your insurer. If the association has kept the same insurer for 10 years, find out why. Some associations endorse a product regardless of whether it's good or from a reputable insurer, Kofman warns, and they may reap financial rewards by getting you to sign up. Make sure the organization is looking out for its members' interests -- and not its own.

Many clients are relieved to outsource the headache health care has become.

8. Outsource it
Many clients are relieved to outsource the headache health care has become. If you want to hand off all of your human resources hassles -- not just health insurance -- you might consider a professional employer organization, or PEO. Such organizations serve as outsourced human resources departments. For a monthly administrative fee, usually about 1.5% to 3% of your gross payroll, the PEO handles it all -- insurance, benefits, payroll, workers' compensation, and other HR-related services. Like purchasing pools, PEOs aggregate a large number of clients and their employees into a single group, and as a result often command far more favorable health insurance rates than individual companies. ADP TotalSource, a PEO in Miami, for example, has 4,600 clients nationwide, roughly 90% of whom get health benefits through the company. Pooled purchasing power is part of the attraction, says Carlos Rodriguez, ADP's division vice president, but many clients are also relieved to outsource the whole headache that health care has become. "Employers with 20 workers don't want to be worried about plan design or negotiating renewal rates with a carrier every year," he says. "They're looking for a way to do it more efficiently."

About 700 PEOs exist today, and the bulk of their clients are companies with 15 to 75 workers, says Edie Clark, spokesperson for the National Association of Professional Employer Organizations. To find a PEO, visit www.napeo.org.

9. Get healthy
Last year, Standard Process in Palmyra, Wis., took a bold step toward creating a healthier workplace. The company, which makes dietary supplements, replaced the candy bars and potato chips in its vending machines with bags of nuts and low-sugar yogurts. The shift was just the latest step in Standard's eight-year effort to help its 200 employees embrace healthier lifestyles. The program's centerpiece is an annual wellness challenge. At the beginning of each year, employees can get a free on-site physical, complete with glucose screening and bone-density tests. In 2004, 135 employees, or 68% of the work force, signed up. Of those, 60 went on to complete the challenge by meeting 16 out of 19 requirements throughout the year, such as maintaining or lowering their cholesterol level, working out regularly at the on-site fitness center, and not smoking. Each employee who met such goals earned a $500 bonus.

Standard will spend $190,000 this year to maintain its wellness program, says director of human resources Scott Alcorn, so it zealously tracks ROI. The company, which self-insures, says that its annual costs for prescription drug claims dropped 1.5% in 2004. Its overall medical spending, meanwhile, rose 4.2%. Nationwide, overall spending on health care rose 7.5% and prescription drugs 8.8% in the first half of 2004, according to the Center for Studying Health System Change and the Employee Benefit Research Institute.

Experts caution that a comprehensive wellness program like Standard's is a long-term investment and may not make financial sense for an employer with high turnover. (Standard's annual turnover runs a low 8%.) But promoting healthful habits doesn't have to mean a huge financial outlay. Offer discounts to a local health club, start a walking club in the office, serve salads instead of slices of greasy pizza at company lunches. Factor in some of the cost-cutting ideas that are mentioned above, and who knows? Maybe next year's renewal rates won't make you sick to your stomach.

Jennifer Gill is a freelance writer based in Rahway, N.J.

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