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Controlling Health Care Costs
Higher deductibles, co-pays emerge as weapons in battle to slow runaway insurance costs
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Business New Haven
2/3/2003
By: Karen Singer
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Desperate to curb spiraling health-care costs, small employers are devising new strategies and evaluating new plans introduced by Connecticut insurance carriers.
The plans, which feature higher deductibles and higher co-pays, offer more options to offset double-digit premium hikes over the past couple of years.
"Premiums used to be the only issue," says Stephen Glick, president of Chamber Insurance Trust, an Orange-based company catering to chamber of commerce members throughout the state. Now, he says, "Business owners really have to get involved in health care."
"The days of an employee being able to pay $5 [co-pay] for a service are over, and the days of an employer just absorbing any increase are over," adds Edmund J. White, executive vice president of the Robinson Co. in Waterbury. An employee-benefit consultant, White works with Manufacturers Alliance of Connecticut (MAC) members, as well as other groups and employers of all sizes.
Small employers in Connecticut are at a particular disadvantage because their size, up to at least a dozen or so employees, gives them little ability to self-insure, and raises the specter of renewal refusal if too many members drop out. For businesses with more than 50 employees, premium rates are based on actual claims experience.
Older employees can add to the problem, in part because of higher premiums, which likely will rise even higher as carriers reduce age bands from ten years to five. HMO ConnectiCare, for example, already uses five-year bands for nearly all its plans, and HealthNet of the Northeast is implementing a similar strategy this year.
Prohibitive costs have forced some small employers to offer health insurance to the employee only, leaving "spouse and children on their own," says Dan Hanley, managing director of WeInsureHealth.com, a Web site specializing in small-business sales.
Others are reducing family benefits or dropping group plans in favor of individual plans, which typically cost less but also offer less and require medical underwriting.
Most employers, White says, are looking into "plan design change, renegotiating plans with vendors and increasing employee contributions."
An increasing array of choices has become available since last year, when the state's Department of Insurance began approving plans with increased limits for co-payments and deductibles.
"The difference is the level," says Paul Philpott, chief marketing officer at ConnectiCare. "They never had approved a deductible of more than $500 for hospitalization, and the standard co-pay for years had been $10."
The new plans, however, allow deductibles as high as $5,000 for hospitalization and a $30 maximum for co-payments.
Such changes were implemented because "small employers, mainly represented by chambers of commerce, came and told us what we already knew: that the cost of health insurance was rising, and many were having trouble and needed some help," says state insurance Commissioner Susan F. Cogswell. "Then companies came in and started submitting modified plans, basically [shifting] more expenses to employees."
After much staff debate concerning fears "employees would not have as much access to health care," Cogswell says, consensus was reached on approving plans with more options because they were determined to be "better than having no plan.
"I think as a result we're going to see more individuals retain health insurance than not, which is really our goal," Cogswell says.
The plans have been good for ConnectiCare's business, says Philpott, helping to account for between 35 and 40 percent of ConnectiCare's new small-business sales over the last several months.
A "second wave" of new plans, featuring upfront deductibles, are just coming on the market. ConnectiCare, for example, is offering a $1,500, $2,500 and $5,000 deductible plan. The deductible does not apply to preventive services and a pharmacy benefit.
As consumer-driven health care becomes more widespread, Philpott is among those expecting to see more small employers adopting plans using health reimbursement accounts (HRAs). "An IRS ruling last summer was favorable to HRAs," he says. "They've been out there for two or three years, but have not gotten a whole lot of traction until the last six months."
Such tax savings are an integral part of Glick's "Chamber integrated sales solution" to health care coverage, which also includes high deductible plans as well as supplemental programs to handle gaps in medical coverage.
There are several ways an employer can gain a tax advantage.
New up-front high deductible plans might be implemented in conjunction with an HRA, in which an employer would set up employee accounts with funds covering, for instance, half of a $1,500 deductible needed before the plan becomes effective. Unused funds can be carried over from year to year.
A Section 105 plan allows the employer to reimburse an employee for certain out-of-pocket health care expenses. If the employer raises a deductible to $1,000, for example, the employer may offer to pay all or part of the fee. The reimbursement is deductible for the employer and not taxable to the employee.
"The current trend is using it for things like hospitalization and out-patient services, but the next trend is to use it for everything," Glick says.
Tax savings also may be realized through a Section 125 plan, where employees contribute to a flexible spending account for anticipated out-of-pocket health services.
"This benefits the employer by reducing FICA taxes," Glick says, adding the downside is employees must spend their pre-tax contributions within a year.
Glick also advocates "bridge plans," in which employees can buy supplemental insurance plans for hospitalization, outpatient procedures or other services.
Colonial Supplemental Insurance has seen sales of bridge plans soar since it began marketing them in Connecticut last fall. Some employers are purchasing them for employees, according to district manager Roseann Reynolds.
"It reflects how the employer feels about their employees, and some are feeling guilty about rising health-care costs," Reynolds says. Premiums begin at around $18 a month for a $1,000 deductible plan for employees under age 50.
Integrating tax-saving alternatives with high deductible plans, bridge plans and supplemental benefit packages, Glick says, increases options, reduces premiums and can result in "comprehensive bottom line savings."
Faced with a $500 per month (or 37 percent) increase when his wife turned 60, for example, a small-business owner purchased a high deductible plan, implemented a 105 and pared down doctor visits. The result, according to Glick: a zero-percent increase.
In another case, using a Section 125 and switching to high deductible plan enabled a company with 18 employees to buy dental and life insurance, with no hike in premiums.
One of Glick's clients, Leadership Education & Athletes in Partnership (LEAP) is holding the line on premium costs this year by increasing a $1,500 deductible for hospitalization to $2,500.
"We could have increased it to $5,000, but decided just to go in the middle," says Janine Colonese, LEAP's director of finance and administration.
Already smarting from year-end layoffs of 25 employees and closure of three offices due to state and federal spending cuts, the non-profit was forced to scale back health coverage from 50 to 20 employees.
"The co-pay remains at $20," Colonese says, adding LEAP will be offering employees a bridge plan to cover $1,000 of the deductible.
Brendan Coyne, who sells small-employer policies for Group Insurance Associates in Woodbridge, is among those reporting more interest in Section 105s, especially in conjunction with increased deductible plans.
"We're also starting to sell one- or two-man groups $1,500 upfront deductible plans with $30 co-pays," Coyne says.
Although most health plans include a prescription component, Coyne adds that small employers, particularly those with older workers, may want to look into online prescription services, which could provide additional savings.
Philpott, however, is less enthusiastic about such alternatives. "This is not a substitute for a comprehensive pharmacy benefit," he warns.
"A lot of folks also are trying to get their kids onto the HUSKY [Healthcare for UninSured Kids & Youth] health program," Coyne says, referring to the state-subsidized health-care plan for low-income children and their families.
In December, the Connecticut Business & Industry Association (CBIA) began offering small businesses a new "value plan," which expands existing choices from five companies: Aetna U.S. Healthcare, Cigna Health Care of Connecticut, HealthNet, Oxford Health Plans and ConnectiCare.
Each plan offers three HMO and three Point of Service (POS) options, most with a defined contribution and gatekeeper model, according to Philip Vogel, senior vice president of CBIA Service Corp. Also new is a $30 co-payment option.
"What sets these apart is that each employee has a choice of health carrier and plan design," Vogel says. "I think we're going to be seeing higher deductibles, but that will be slower in coming."
HealthNet currently offers a menu of HMO plans featuring deductibles ranging from $1,500 to $5,000. Its portfolio also offers plans with co-pays as high as $30 and three-tier prescription co-pays, according to Steve Guarino, HealthNet's vice president of small business. "We are implementing plans to the highest degree the state will allow," he says, adding the company has begun to introduce upfront deductible plans.
HealthNet also is providing tools to help employees make health-related decisions. The company's Web site, for example, has a feature enabling users to compare the cost and quality of health care in hospitals in their area.
New plan designs featuring higher co-pays and high deductibles are helping to spur employer group enrollments for Anthem Blue Cross & Blue Shield of Connecticut. "We had over ten-percent growth in the past year," reports Dave Fusco, vice president and manager of individual and small business accounts.
An upfront high deductible preferred provider organization (PPO) plan with several options hits the market this month. One of the choices offers 80-percent coverage in network and 60 percent out of network once a $1,000 deductible is met, according to Anthem marketing manager Michele Amendola. Anthem also is adding a $5,000 high deductible HMO option later this year.
Some small businesses are making a point to partner with employees in a way that encourages them to maximize their health care dollars.
"About five or six years ago we instituted an employee contribution toward the cost of benefits, and that has slowly risen," says Roger Joyce, vice president of engineering at the West Haven-based Bilco Co., which manufactures specialty access products such as basement doors and roof hatches. Joyce describes the 125 employees, 40 of them union members, as an "older workforce." Employees can choose "a very rich plan or less depending of their age and family situation," from a menu of HMO and PPO plans.
"We have worked with our carrier to restrict certain procedures we don't think are medical issues, such as cosmetic surgery or Viagra," Joyce says.
Bilco also is proactive in supporting employee fitness, encouraging workers to join health clubs by paying a portion of membership dues.
As small employers explore new health-care options, state insurance Commissioner Cogswell offers this advice: "Look around carefully at various plans to see what's the best fit."
That's already happening.
"Over the last couple of years, small-business owners have become more aggressive in shopping around and getting more quotations," says Einar Gudjohnsen, CEO of HPM Industries and president of the New Haven Manufacturers Association.
"They're trying to figure out what can make a difference, so there is a lot of experimentation going on," adds Jan Spegele, general counsel for CBIA.
The state insurance department also is trying to sort out how to provide some relief to rising premium costs, which are higher in Connecticut than most other states.
"We're looking at several areas," Cogswell says. One potential target is mandates, which are health plan requirements state legislators have approved in ever-greater numbers. More proposals are in the pipeline to mandate hearing aids for children and talking prescription bottles, among other things.
Cogswell says her department also supports medical savings accounts, which are federally mandated but cannot be sold or marketed in Connecticut because of a conflict in state law with federal law involving deductible expenses for home health aides. Similar to health reimbursement accounts, MSAs enable individuals to set aside pre-tax dollars to fund medical expenses, and allow unused funds to be rolled over to the next year.
"Every year for the last five years legislators have proposed changes in the law [regarding MSAs], and it will be proposed again," says CBIA's Spegele.
More assistance could come in the form of Association Health Plans (AHP), a Bush administration proposal allowing small businesses to band together and presumably pay less for health insurance.
In the meantime, part of the solution, Spegele says, involves educating Connecticut legislators about how health-care costs affect employers and employees.
She recommends employers speak to their legislators - as often as possible.
"Being confronted with statistics is one thing," she says, "but hearing tales of how employers are struggling with decisions to hire a new employee or let one go, or cut benefits, can have an enormous impact."
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