Building a Transition
Strategy for Soaring Health Insurance Premiums
David W. Pearce, Marsh Advantage America
Like it or not, employers must face hard decisions
this year regarding changes that will be made in health plans offered
to employees as their current policies renew. Average rate increases
are falling in the 20% to 30% range. Increases from 50% to 100%
are not uncommon. CALPERS, the nations largest purchaser of
employer-sponsored health plans (after the federal government),
is taking an average rate increase of 25% on its HMO plan offerings.
This comes after increasing some copayments and decreasing
some benefits. Most employers are faced with absorbing a high percentage
of these increases, passing on to employees only 25% to 50% of the
Several factors contribute to the super-inflationary
rate increases that exist in the market today.
Medical inflation. Expensive technology
and increased utilization are driving up the cost of delivering
care. Estimates are as high as 16.5% for the HMO model,
and 13% for the PPO model.
Prescription drug costs. Increased
utilization, pharmaceutical advertising, and huge R&D investment
are driving up health plan costs for prescription drugs
by as much as 25% to 30% per year. Just the prescription benefit
alone can account for as much as 40% of rate increases that
are being passed along.
Lower investment income among insurers.
Insurance companies in the mid- to late 1990s were able to subsidize
competitive but inadequate pricing by making huge
profits in the equity markets. That is no longer a source
of substantial revenue for carriers.
An aging population. As the boomer
generation and those that follow grow older, they are consuming
more health services, which leads to a greater demand for
Government mandates. Federal
and state government mandates for mental health, wellness,
and other benefits are being priced into plans at renewal.
Consolidation among insurers and providers.
Five or six years ago, Orange County had 15 HMO carriers to
choose from in all or some parts of the county. Now there are
only eight, including Kaiser Permanente. If you want access
to the St. Josephs Foundation doctor and hospital system,
for example, there are only four HMO carriers. These carriers
are all so large now that they raise rates without fear of
what market share they may lose.
Provider re-contracting. Consolidation
among providers and carriers is creating tension, and the providers
have the leverage at this time. Doctor groups and hospitals
are reducing their risk and increasing their fees.
Each of these factors is simultaneously
being passed through to employers as a contributing percentage
of a nasty renewal increase. What can any employer do? Is there
any relief in sight?
Unfortunately, although this could be the
year with the highest average premium increases in history, we may
only see some softening in the intermediate term, because most provider
contracts are in place for the next two or three years. Most forecasts
call for double-digit health plan inflation for the foreseeable
future. Only a shift in strategy and a willingness to adopt some
creative options can make a significant difference in holding down
I offer the following recommendations:
Detailed analysis of employee needs
and expectations. Take a serious look at what benefits your
employees expect and what benefits competing companies are offering.
Decide what you need to have to attract and retain the talent
necessary for your success. Understand the cost of lost productivity
due to dissatisfaction with employee benefit programs. Manage
employee expectations so that necessary restructuring is seen
as a continuing investment in them and their well-being.
Plan design restructuring.
Be willing to raise and/or add deductibles, copayments,
and co-insurance (or cost sharing) by employees when receiving
services covered by the plan. Make multiple plan changes
at the same time. For example, increasing office visit copays
from $10 to $15, adding a per-admission copay of $200-$300 for
hospital stays, and increasing prescription copayments by $5
or $10, when combined, can offset monthly premiums by
as much as 8% to 12%. Be willing to accept a $500 or $1,000
calendar-year PPO deductible in place of a $250- or $500-per-year
deductible. Feel confident that 80% coverage in a PPO network
is still very rich coverage. Know that a three-tier prescription
copay schedule of $10/$25/$40 is reasonable. Promote
Wellness Benefits, and consider coverage for alternative
therapies, such as acupuncture, massage therapy, and chiropractic
care. At a small cost, you can drive utilization into alternative
treatments that are funded more by employees, keeping them from
over-utilizing the health plan.
Give employees more choices. Consider
plans that allow employees who are healthy and/or can afford
it to purchase higher deductibles or copayments. Consider plans
that have tiered benefits based upon the provider network used.
In these plans, high-end hospitals and specialists may be used
as in-network providers, but at higher copays or co-insurance
levels. The more consumers participate in the cost of delivering
care, the more consumers will pressure providers and
hospitals to keep costs down.
Choose a knowledgeable and creative
insurance professional. Having a professional, creative,
and knowledgeable broker who has his or her pulse on what is
new on the health plan horizon is essential in forming a winning
strategy. Carrier and provider relationships are changing constantly.
Plan design offerings are being added and taken away regularly.
New ideas are being offered with greater frequency. The market
will find its own level before the dam breaks. A good broker
will keep you from being swept over the spillway before it does.
David W. Pearce manages business development
for Marsh Advantage
America. A service of Seabury & Smith Inc., March
Advantage America manages and administers insurance programs for
growing businesses, associations and affinity groups, educational
institutions, nonprofits and individuals. Mr. Pearce can be reached
at 714.245.7825 or firstname.lastname@example.org.
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