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Building a Transition Strategy for Soaring Health Insurance Premiums
By 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 nation’s 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 increased cost.

Several factors contribute to the super-inflationary rate increases that exist in the market today.

  1. 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.

  2. 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.

  3. 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.

  4. 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 resources.

  5. Government mandates. Federal and state government mandates for mental health, wellness, and other benefits are being priced into plans at renewal.

  6. 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. Joseph’s 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.

  7. 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 costs.

I offer the following recommendations:

  1. 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.

  2. 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.

  3. 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.

  4. 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 david.w.pearce@seabury.com.



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