Employers grapple with escalating health costs: under pressure to not cut benefits, but pressed by skyrocketing costs, employers are exploring ways to provide coverage without going bankrupt

As the cost of medical benefits soars, employers are exploring a variety of strategies--some draconian, others incremental--to maintain medical coverage. And, at the same time the pressure to find creative financial solutions is mounting, evidence of the critical role of health insurance is coming into sharper focus.

Employers have long accepted the idea that health coverage is a key component of total compensation. Now that research is increasingly illuminating the role of health insurance in assuring worker health and productivity, companies that may have been considering drastically cutting or eliminating medical benefits are rethinking the decision. A study published in May by the Institute of Medicine in Washington, D.C., concludes that health insurance is a key that provides access to high-quality health care and to better health, "The quality and length of life are distinctly different for insured and uninsured populations."

The study, "Care Without Coverage: Too Little, Too Late," compared the health outcomes of individuals with and without health insurance suffering from such ailments as cancer, diabetes, cardiovascular disease, HIV, and mental illness. It starkly concluded that health insurance is a matter of life and death. It pointed to one analysis that found that over a 17-year period, "adults who lacked health insurance at the outset had a 25 percent greater chance of dying than those who had private health insurance."

Moreover, health-insurance advocates warn employers that dropping employee coverage isn't a financial elixir. Acutely ill uninsured patients generally receive some level of medical care that is paid for by society. "The bottom line: Care for the uninsured is paid for by everyone, often in inequitable ways," according to Covering the Uninsured, a public-policy project of the Robert Wood Johnson Foundation and other supporting organizations such as Service Employees International Union, the American Medical Association, and AARP.

The project was launched in February to publicize the steady decline in health coverage and its health and financial impacts. Last year, two million Americans lost their health coverage, "the largest one-year increase in the number of uninsured in nearly a decade," the group reports. That brings the total of uninsured people to about 41 million.

Search for alternatives

Against this backdrop, few employers that can afford to provide at least some basic level of health insurance appear ready to drop it altogether. "That's not something we'd even consider," says Pamela Perrott, senior vice president of human resources for Markel Corp., a property casualty insurance holding company in Glen Allen, Virginia, that has 1,100 employees in the United States and 600 in other countries. Like many other companies, Markel has been experimenting with new health-benefit options and pricing structures, Perrott says. With annual average health-benefit costs jumping 13 to 15 percent, employers have no choice but to consider alternatives. Hewitt Associates, a consulting firm headquartered in Lincolnshire, Illinois, recently polled 702 corporate HR executives about their health-plan experience and strategies. They concluded that most employers "face cost increases that exceed their budgets and ability to pay."

The severity of the financial challenge posed by rising health-plan costs, as well as the range of responses, appears to vary significantly according to employer size. In general, larger employers aren't in as dire financial straits as smaller firms, and aren't considering as radical a response.

The Hewitt report shows, for example, that 43 percent of the employers surveyed with more than 5,000 employees said that their primary focus was to "increase employee premium contributions" or to effect other forms of cost-sharing through changes in plan design. By contrast, only 17 percent of the respondents indicated that their primary focus was to "implement new delivery systems and purchasing models."

Large employers did, however, report "moderate interest" in other approaches, including disease management, health-improvement programs, and simply changing health plans altogether.

No magic answers

"While the pressure to control costs and embrace change is clear, the silver bullet is not," the report concludes. Nearly 60 percent of survey respondents said they're simply making "incremental benefit-design and contribution changes." Only 14 percent reported plans to "re-evaluate the total strategy and approach to health-care costs and sharing."

For Markel Corp., a key focus was conditioning employees to accept the new health-plan pricing that was put into place this year. The most dramatic change came in the area of co-pays for prescription drugs, some of which doubled in price. Other noteworthy changes included the introduction of a "bare bones" low-cost, high-deductible insurance option. "We used an aggressive education program," Perrott says. The effort included the use of employee focus groups at the beginning of the process to forecast employee response to the changes, and to determine the most appropriate ways to respond.

Focus-group participants also were used as "emissaries" to the broader workforce to relay the company's rationale for making the changes. Some participants were chosen because they expressed strong misgivings about possible changes. "We won most of these people over and had very little fallout when the plan was rolled out," Perrott says. The company was careful to make sure employees fully understood the implications of their actions if they selected the "bare bones" policy.

"It has a zero premium, few co-pays and restrictions, but a very high deductible--$2,500," she says. Every employee who selected that high-deductible plan got a call from Markel's HR department. "We talked some people out of it. In some cases they may not have gotten beyond the zero premium to understand the high deductible," she says.

Another cautious midsize employer, St. Rita's Medical Center, a 2,700-employee health complex in Lima, Ohio, has so far reached only the fine-tuning stage with its health plan. Paul Wong, St. Rita's manager of compensation and benefits, says the organization has begun to phase out a policy that allowed employees with longer tenure to contribute less to the cost of their health benefits than more recently hired employees. The thinking was that long-term employees could be rewarded through more direct forms of compensation, rather than creating distortions in the organization's health-plan pricing.

St. Rita's also has increased overall cost-sharing with employees this year--although not enough to stir any significant protest. Employee surveys have, however, revealed some dissatisfaction with St. Rita's overall benefit plan. "Employees are influenced by the local climate," Wong says. St. Rita's is forced to compete, at least to some degree, with large unionized industrial employers such as the Ford Motor Corp. that offer very generous benefits.

So unless the financial pressure becomes intolerable, Wong says, he'll resist making any radical changes to St. Rita's health plan.

Pressure on small employers

In contrast, many smaller employers have had no choice but to make dramatic changes just to continue to offer employee health coverage. For example, double-digit jumps in health-benefit costs forced an Indiana newspaper publisher to jack up deductibles by 150 percent to $500 last year, says Nancy Siebel, HR manager for Kendallville Publishing Company. Deductibles went up another 15 percent this year.

In response to those and other changes to the plan, several married employees dropped the coverage and relied on their spouses' plans. After recovering from the shock of higher prices, and realizing that it was better than most of the alternatives, some returned to the plan.

Employers like KPC have discovered that small isn't beautiful when it comes to buying health insurance. Recent research from the Kaiser Family Foundation and the Health Research and Educational Trust reveals that the smaller employers' health costs are climbing, on average, more rapidly than those of larger firms. Last year, for example, companies with fewer than 10 workers saw their premiums jump by an average of 17 percent, versus 11 percent for employers with between 50 and 200 workers.

Not surprisingly, the proportion of small employers offering health benefits is far smaller than that of large employers. Sixty-five percent of employers with fewer than 200 employees surveyed by Kaiser offered health benefits last year, in contrast to 99 percent of employers with more than 200 workers. And the percentage of small employers offering health benefits dipped 2 percent from the previous year, an ominous trend, according to health-coverage advocates.

Doing the right thing

Still, as the numbers indicate, the majority of smaller employers are hanging in there with health-care coverage. The most recent Employee Benefit Research Institute Small Employer Health Benefits Survey asked employers with up to 50 employees why they are continuing to insure employees. Most said because "it's the right thing to do." They also said that health benefits aid recruitment, increase loyalty and productivity, decrease turnover, and fulfill employee expectations.

Asked to describe the major impact of offering health benefits, most employers say recruitment and retention. Among those who don't offer medical coverage, 53 percent say the main reason is that they can't afford it; 40 percent say that they're too uncertain about the future to commit to a plan.

Insurance agents are acutely aware of the decreasing ability of small employers to continue buying health coverage, and are worried that many will be priced out of the market. Like the larger employers responding to the Hewitt survey, smaller firms also are "engaged in significant cost-shifting to employees to keep premiums down," notes the Washington, D.C.-based Council of Insurance Agents and Brokers. The organization says that unless something is done to control the price of group medical coverage, many small employers will be forced to drop coverage altogether in the next few years. In addition to higher deductibles and increased co-payments, the council says, "some businesses are putting in tiers of coverage where workers can pick from various levels of coverage depending on how much out-of-pocket coverage they can afford?"

The group also observed the growth and evolution of "voluntary" employee-paid supplemental insurance products. KPC is considering making new voluntary supplemental insurance available to its employees, Siebel says. Several of the publisher's employees already own cancer insurance policies purchased in a successful voluntary insurance program several years ago, she says.

Supplemental insurance plans

One new category of voluntary coverage is "medical gap" insurance--the industry's response to the trend toward higher and higher deductibles on health insurance. "There are employers introducing $3,000 and $5,000 deductible plans," says John Penko, chief marketing officer of Manhattan Insurance Group in Houston.

Boosting deductibles not only dramatically reduces employers' costs but also returns health insurance to its origins as a safeguard against the financial consequences of catastrophic medical events. Workers unaccustomed to having to periodically pay out large sums before their health-benefit coverage kicks in are the target of new "medical gap" policies such as AFLAC's Personal Sickness Indemnity Plan, Colonial Life & Accident's Medical Bridge policy, and Manhattan Insurance Group's Med Choice product.

These policies help defray the cost of medical expenses such as doctor's office visits, certain hospital expenses, and outpatient surgery services up to relatively low fixed ceilings intended to approximate the employee's out-of-pocket obligations under his or her employer-paid plan.

"These aren't major medical plans and won't take care of a catastrophe, but they do help workers manage their expenses," Penko says.

Although by definition the cost of "voluntary" insurance is borne by the employee, nothing prevents the employer from helping to defray some of the cost of these plans. Cherie Tibbits, vice president of marketing and product development for Colonial in Columbia, South Carolina, says that "a lot of employers" are contributing to the cost of supplemental medical plans. In some cases employers can come out ahead of the game by raising deductibles on their basic health plans dramatically, then contributing to the cost of gap policies, she says.

Critical-illness coverage

Another significant development in the supplemental health arena is the evolution of "critical illness" policies. Pioneered by AFLAC in the 1950s, such policies originally focused on covering non-medical ancillary expenses associated with cancer treatment. They are built more on a life-insurance than a medical-indemnity benefit model: if a policyholder contracts the disease, he receives a fixed payout directly from the company.

Richard Harlow, an insurance broker based in Reston, Virginia, explains that today such policies cover a prescribed list of life-threatening (but not necessarily life-claiming) illnesses. "They've defined a whole list that, 20 years ago, you might have died from and been able to collect life insurance," he says. Thanks to medical advances, more people are surviving many serious illnesses, and a new kind of insurance was needed, he says. Conditions such as kidney failure, Parkinson's disease, stroke, and even some heart conditions might be covered. "If you get one of the covered diseases, the moment you're diagnosed you file a claim and they send you a check for the face amount of the policy."

When the economy is strong and labor is in short supply, employers don't push as much of the health cost on employees. And that's what most companies would like: to be able to offer well-rounded health-benefits that meet the needs of employees, their dependents, and the good of all.

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A business lobbyist shares his thoughts on how businesses can decrease the number of uninsured workers. workforce.com/02/07/feature2

RELATED ARTICLE: Three Types of Supplemental Medical Plans

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The following are descriptions of the key features of three supplemental medical plans currently available.

Example 1: A personal indemnity policy

Coverage highlights: Physician visit coverage varies from $15 to $25 per visit, depending on level of coverage purchased. Hospital confinement benefits vary from $50 to $200 per day based on level of coverage and duration of hospital stay. Diagnostic exams: up to $150 per test for covered sicknesses. Surgical: $100-$2,000 (excludes cosmetic or elective procedures not related to sickness). Hospital-based rehab services: $60 per day. Ambulance benefit: $100 for ground ambulance and $1,000 for air.

Example 2: A coverage gap-filler policy

Coverage highlights: Five different benefit levels and four coverage options (single, employee and spouse, one-parent families, two-parent families) available. Benefits paid as lump sum per covered hospital confinement or outpatient surgery to help cover deductibles, co-payments, child care, or transportation to or from hospital. The policy is available with guaranteed-issue underwriting, assuming that minimum participation levels are achieved. As an individual policy, it's portable and guaranteed renewable.

Example 3: A classic supplemental policy

Coverage highlights: $200 a day for hospital confinement (limited to 90 days), an amount that is doubled for intensive care. It also covers $50 a day for attending physician fees, 80 percent of usual and customary hospital expenses up to $5,000, up to $3,000 for inpatient or outpatient surgery, $75 for physician visits (after a $25 co-pay), and additional coverage for ambulatory care, emergency accident and ambulance services, prescription discounts, and a $10,000 critical illness benefit.

Richard F Stolz is a financial journalist in Rockville, Maryland. To comment, e-mail editors@workforce.com.

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