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10 Ways to Cut Your Health Care Costs

If you haven't already received your company's health-insurance renewal notice this year, brace yourself. Average costs per employee seem certain to surge by more than 20 percent for the second year in a row.

Among who responded to an August healthcare survey, nearly one-third reported health-insurance premium increases of 30 percent or more. Thirty-seven percent reported increases ranging from 16 percent to 29 percent. At that rate, the average cost of health insurance per employee will exceed $3,000 in 1990, up from $2,748 in 1989, according to A. Foster Higgins & Co., a benefits consulting firm based in New York.

A recent survey by Nobel Lowndes, an employee-benefits firm in East Orange, N.J., found that 73 percent of senior executives believe health-care costs will continue to increase 20 percent or more each year for the next three years. These gloomy executives are primed for the worst, knowing that costs already have gone up eightfold since 1970.



Moreover, business shouldn't count on Congress for a big fix. Although some lawmakers favor a Canadian-style nationalized health-care system or mandated coverage for all workers, those legislators comprise a vocal minority that is better at capturing public attention than winning converts on Capitol Hill. In addition, both of those proposals focus on broadening coverage to the nation's 31 million to 37 million uninsured, not on controlling spending.

The message here is clear: If you haven't already gotten serious about cutting your company's health-insurance costs, now is the time. It can be done. Just ask Philip Leber, who slashed his small company's monthly premium from $10,000 to $2,500. The first thing you should do is learn how the system works—or doesn't work. Most small employers spend fewer than four hours a year thinking about their company health plans. Learn what your options are. Your insurance agent can help you shop for cheaper plans. But don't stop there. Compare plan benefits, insurance-company records, and service guarantees. Consider Blue Cross and Blue Shield plans and HMOs (health-maintenance organizations), even if your agent doesn't handle them. The Blues in some areas offer clear advantages to small companies. Experts regard HMOs as the best buys in health care.

Find out if your company is eligible for new, low-cost health-insurance plans now available in five states. In addition, foundation-funded pilot projects in several parts of the country are demonstrating that it is possible to cut health-coverage costs 30 to 40 percent. In short, health insurance isn't as simple as it used to be. And the pace of change is accelerating, offering new hope for a truce in the business battle with exploding health-care costs.

"The next couple of years present as much potential for change as at any time in the past 20 years," says Gail Wilensky, administrator of the federal Health Care Financing dministration, which oversees Medicare. You can be part of that change by putting at least some of the following 10 ideas to work for your company.

1. Increase Cost Sharing By Employees
This recommendation is at the top of every consultant's list. Small companies tend to pay far more of their workers' total healthcare bill than large companies do. Yet research shows that insulating employees from the costs of care encourages unnecessary use of health services. Fifty-two percent of the companies responding to the Nations Business health survey said they pay 100 percent of their employees' health-insurance premiums. But 45 percent said they intended to implement or increase employee contributions to these premiums.

An equal number said they plan to increase employee deductibles. Insurance companies first attached $100 deductibles to major-medical plans in the early 1950s. But 40 percent of employers still set deductibles at $100 or less. Celtic Life Insurance Co., a smallbusiness health insurer based in Chicago, calculates that raising a $100 deductible to $250 would cut premium costs for single coverage by about 11 percent. A $500 deductible' would cut costs by about one-fourth. A $1,000 deductible would save about one-third.

2. Allow Employees To Pay For Health Premiums With Tax-Free Dollars
Set up a so-called flexible spending account, which allows your employees to pay their share of healthinsurance premiums and unreimbursed health-care expenses with pretax dollars dollars. A flexible spending account could save employees 20 cents to 35 cents on the dollar, because state and federal income taxes and Social Security taxes are not imposed. Moreover, the company saves by reducing the employee's base salary on which it pays Social Security and other taxes. Hire an outside payroll accounting firm to handle the paperwork. You can pay the service fee and still come out with a net savings, says Don Brown, a Silver Spring, Md., insurance broker. The monthly administration fee would run between $2 and $5 per employee.

3. Transfer High-Risk Employees To The State's High-Risk Pool
Insurance premiums soar whenever someone in a small-group plan becomes very ill—with cancer or heart disease, for example. As an employer, you should explore the possibility of moving employees with serious health problems into a state high-risk pool and then negotiating a lower premium for the healthy members of your group. Twenty-four states have high-risk pools for people whom insurance carriers don't want to cover, although some of these pools are not yet operational. Risk-pool insurance generally sells for 150 percent of the typical individual premium. The insurance is comparable to that offered by a standard majormedical health policy. Rules governing coverage differ from state to state.

For example, some states won't allow employers to move high-risk individuals into the pool; only the uninsured are admitted. Other states encourage it. Some state pools have waiting lists. Call your state insurance commissioner's office for details if you live in one of the following states: California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Louisiana, Maine, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Carolina, Tennessee, Texas, Utah, Washington, Wisconsin, Wyoming.

4. Switch To An Open-Enrollment Blue Cross And Blue Shield Plan
Blue Cross and Blue Shield plans operate as de facto high-risk pools in a number of states by providing "open enrollment" periods during which any group can buy insurance. Among the 74 Blue Cross and Blue Shield organizations nationwide, 21 offer open enrollment. Open-enrollment plans "are better than state risk pools because Blue Cross offers coverage at substantially less cost than the rates charged by state pools," says Greg Scandlen, director of states services research for the Blue Cross and Blue Shield Association in Washington, D.C.

Employers who buy open-enrollment plans are insulated from the premium spikes they can experience with other insurers once someone in the group becomes very ill. These plans use so-called community rating to calculate premium increases. All companies buying one of these policies are in the same risk pool, and all pay the same rates. All the Blues once used community rating to set premium levels. But that began to change in the 1960s when commercial insurers started to lure away firms with low risks by offering them cheaper health insurance. The Blues increasingly found themselves writing policies for groups with above-average health claims.

As a result, premiums went up. And most Blues today use the same health screening and rating practices used by commercial insurers. Five of the open-enrollment plans limit applications for insurance to specific periods during the year. Some will take groups no smaller than 10 employees. For details, contact Blue Cross plans in Alabama, Maryland, Massachusetts, Michigan, the National Capital Area (Washington, D.C), New Hampshire, New Jersey, New York (six different plans), North Carolina, Pennsylvania (four different plans), Rhode Island, Vermont, and Virginia.



5. Replace Your Traditional Health Plan With An HMO
Unlike traditional health insurance, HMOs cover all medical needs, including routine preventive care, for a flat monthly fee that typically is less expensive than traditional health insurance. Moreover, two types of HMOs, the staff and the group models, have proven to be more effective at controlling costs than any other form of health-care delivery. Staff models employ physicians directly and put them on salary. With group models, the HMO contracts with a multispecialty group practice and caps payments for services.

Look for an HMO that operates in accordance with voluntary federal standards, so-called federally qualified HMOs. These HMOs are barred from refusing health coverage based on medical screening. Their premium rate increases are tied to the experience of everyone in the HMO, which protects a company from sharp increases based on heavy claims from a few of its employees. There are 307 federally qualified HMOs covering more than threefourths of all persons enrolled in HMOs nationwide.

The catch with an HMO is that those who are covered have to use the HMO's doctors and the hospitals that it desigdesignates. Those unwilling to surrender their freedom of choice can go for an "open-ended" HMO, a new hybrid that will allow the insured to see doctors outside the HMO if the covered person is willing to pay out-of-pocket deductibles and coinsurance. Enrollment in open-ended HMOs jumped 39 percent in 1989. Because HMOs typically can't afford to market to small companies, start your search in the Yellow Pages.

6. If An HMO Is Out, Shop For A Traditional Plan With Managed Care Or A PPO
Switching to a managed-care health plan with built-in restraints on the use of health services should cut your costs by 5 to 10 percent. The costliest health insurance you can buy is a traditional indemnity plan. Under such a plan, employees choose their physicians. Insurers, acting as a passive pass-through mechanism, reimburse doctors and hospitals on a feefor-service basis. They also increase employer premiums as necessary to keep pace with rising costs. Many experts predict that traditional indemnity health insurance will be replaced by managed-care indemnity plans by the mid-1990s. Managed-care plans attempt to hold down costs by placing controls on the use of medical services.

Most insurance carriers already offer a variety of managed-care features as additions to traditional indemnity plans. They include prior approval for elective hospital admissions, second opinions for surgery, utilization review, case management, and discharge planning. A number of insurers also offer preferred-provider organizations (PPOs), which also may be organized by hospitals or sponsored by large employers.

PPOs are groups of doctors who have agreed to discount their fees, usually by about 10 percent to 20 percent. By definition, PPOs build in mapaged-care features to hold down expenses. To encourage use of PPO doctors, employees pay only a small fee of $5 to $10 per office visit. Kmployees may use doctors outside the PPO, but out-of-pocket expenses rise sharply with the addition of deductibles and coinsurance.

7. Purchase Your Health Insurance Through A Business Group Or Coalition
Individual small employers have little or no leverage in buying health insurance, but when a number of small employers band together to purchase insurance, they can wield real clout in the market. The Small Business Service Bureau, an association based in Worcester, Mass., arranges group insurance through HMOs and Blue Cross organizations for 35,000 small businesses—most with fewer than 10 employees—across the country. "We negotiate the terms of the benefits, and we have trained staff members who explain the options to small-business owners," says Lisa M. Carroll, health-services director.

Fred Rohm, president of the New Castle County Chamber of Commerce, in Newark, Del., manages a group-purchasing arrangement for small employers in his area. Premiums for 350 small employers covered by the chamber's indemnity plan went up only 1 percent this year. The chamber in San Francisco launched a group-purchasing arrangement in March. It lets small employers in the Bay Area choose an indemnity plan, an HMO, or a PPO. Ask your local chamber or business association about group purchasing.

But use caution in signing up. Some insurance agents and many business trade associations offer group-purchasing plans known as multiple employer trusts (METs). "METs were everybody's answer to the problem of rising costs several years ago," says David Helms, president of the Alpha Center, a health policy and planning center in Washington, D.C. But METs in general have not lived up to their cost-cutting expectations, primarily because insurers lure away low-risk groups with rock-bottom rates, says Helms. This leaves the MET with higher-risk groups, which erodes its ability to negotiate low rates. Make sure the MET you choose is backed by an insurance company. Self-insured METS—those not backed by an insurer—have experienced high failure rates.

8. Purchase One Of The No-Frills Insurance Plans Now Available In Five States
Virginia, Missouri, Florida, Illinois, and Washington this year exempted small firms from regulations requiring them to provide certain types of health coverage. Typical mandates cover chiropractors, well-baby care, dental checkups, and treatment for alcohol and drug abuse. Some states require coverage for more exotic procedures, such as in vitro fertilization and acupuncture. By exempting small firms from such mandates, insurers may offer no-frills plans with premiums Costing 20 to 40 percent less. To prevent employers from canceling existing insurance, some states restrict the new, lower-cost plans to companies that have been without insurance for at least a year. Call your state insurance commissioner for details. More states are expected to remove mandates for small companies next year.

9. Determine If You Are Eligible For One Of The Low-Cost Pilot Projects Operating In 10 States
Pilot projects funded by the Robert Wood Johnson Foundation of Princeton, N.J., have helped nearly 2,000 small businesses in 10 states purchase health insurance at savings of 30 percent to 40 percent. The projects were designed to attract small, uninsured companies. Although these projects typically exclude firms that have offered group insurance within the past year, there are two notable exceptions—in Florida and Colorado. The Florida Small Business Health Access Corp. in Tampa accepts firms that have gone uninsured for only six months. The corporation currently provides health services to 560 small businesses covering 2,855 individuals. It uses state funds to subsidize marketing and administration. That lowers the cost of premiums employers pay to enroll their workers in a local HMO. A 35-year-old adult male pays $75.52 a month for the standard option plan; family coverage is $198.95.

Eighty percent of the companies enrolled have three or fewer employees, says Ree Sailors, the corporation's director. The legislature more than doubled the plan's subsidy this year to $4.7 million, permitting it to expand into 11 rural counties by next June. In Denver, the Shared Cost Option for Private Employers (SCOPE) accepts small companies seeking to switch to a lower-cost health plan, as well as those currently uninsured. SCOPE, in operation less than a year, is providing health insurance to 471 companies covering 4,296 individuals.

SCOPE'S health plan is the only project funded by the Robert Wood Johnson Foundation that operates without a government subsidy. It cuts premium costs by requiring relatively high deductibles and coinsurance (the percentageof costs not covered by insurance) and by relying on a select group of doctors and hospitals. Routine visits to a doctor's office require a $15 payment. Hospital admissions require an individual to pay a $250 deductible plus half of the first $5,000 in charges. But the planalso covers a wide array of preventive care at no charge.

The high cost-sharing with employees allows U.S. Life Insurance Co., the Neptune, N.J., insurer offering the plan, to keep rates low. A single 35-year-old male pays $54.94 a month; family coverage is $148.47. "In the first five weeks [of the plan], 8,000 businesses called for information," says Judith Glazner, SCOPE'S director. Other Robert Wood Johnson Foundation health-care pilot projects are those operating statewide in Michigan, Tennessee, Utah, Washington, and Wisconsin as well as those in Tucson, Ariz.; Brunswick, Maine; and San Francisco.



10. Seek Out New, Low-Cost Plans Offered By Some Insurers
The low-cost health-insurance plan offered by U.S. Life Insurance through the SCOPE program in Denver already has inspired similar plans, says David Dunn, a senior vice president of U.S. Life. "Just because of SCOPE, most of the carriers in Denver have tried to de sign similar products to appeal to the same market," says Dunn. He has encouraged other insurers to copy the plan and offer it elsewhere. A number have shown some interest in doing so. Blue Cross and Blue Shield organizations also have launched a number of low-cost plans designed for small companies and the uninsured. Blue Cross of Tennessee offers a comprehensive, nongroup program called Impact, for employers with four or fewer workers. Premiums for individuals start as low as $28.13 a month. Blue Cross and Blue Shield of Oregon offers a PPO for small groups. Premiums are about one-third less than those of regular Blue Cross plans.

There are, of course, other ways to cut health-care costs. The additional options that follow are common among midsized and larger companies yet are within the reach of many small firms:
• Start a wellness program that promotes healthful behavior. By some estimates, about one-half of all health problems are related to lifestyle choices such as smoking and neglecting to get proper exercise.
• Explore the feasibility of using a mail-order prescription drug program if you have employees who need large quantities of high-cost maintenance drugs. Mail-order pharmacies do a highvolume business and offer unit prices based on that volume. They are often more aggressive in providing lowercost generic drugs, which can be a cost saving in itself when appropriate.
• Eliminate mental-health and drugdependency care from your health plan, and contract for this coverage separately, using a quality managed-care company that specializes in these services. This strategy can save you 10 to 40 percent of your health-care costs. Mental-health and drug-dependency care are the fastest growing segments of medical plans today. Experts argue that much of the treatment now provided is inadequate or unnecessary.
• Offer a cafeteria-style benefits plan. Cafeteria plans allow employees to tailor their benefits to their individual needs, and they also enable employers to establish limits on company contributions.

For small companies, the frontier in health-care cost management lies in direct contracting with doctors and hospitals. Fred Rohm, of the New Castle County Chamber of Commerce, is eager to test how well this works. Although his plans are still in the formative stage, Rohm knows what he wants: a health center staffed with salaried doctors who would provide basic services to employees and dependents of hundreds of small companies in his area. Patients would receive routine care at the center, including X-rays and laboratory tests. As necessary, the staff doctors would channel patients to outside specialists who would work for discounted fees. Hospital treatment would be paid according to a set fee schedule reflecting significant reductions from usual charges.

"I think we can sell the plan if we can price it at $60 to $75 per month per individual," says Rohm. That's about 40 percent to 50 percent less than the typical health-insurance plan. Rohm is negotiating with JSA Health Care Corp. of Columbia, Md., to set up the proposed health center. JSA is one of a handful of companies nationwide breaking into the business of setting up health centers with "company doctors" for corporate clients.

Joseph L. Falkson, JSA's director of primary health care, says the company currently runs seven similar health centers for dependents of U.S. military personnel, and those centers have succeeded in holding down costs. "We have calculated that between 1986 and 1989, we had 1 million patient visits at the centers," he says. "Our estimate is that we saved the military $40 million over what it would have spent if our patients had been purchasing typical fee-for-service medical care."

Company health centers represent just one approach for solving the health-care problems faced by American business. Clearly, there is no one solution best for all, but there are many small ways in which individual companies, business groups, insurers, and government can chip away at the problems today while contributing to a lasting solution for the future.

Time will tell whether any of the recent innovations in health-care delivery will lead the way out of the current crisis. Hut workable solutions need to be developed sooner rather than later. The nation's employer-based health-insurance system can't take too many more years of 20 percent price increases.

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