Taming rising healthcare premiums- By Don Harper

IF YOU HAVE been in business for at least a decade, you are probably aware that premiums for employer-sponsored health plans have increased about 100
percent since the year 2000. During the same period, general inflation increased by 26 percent. Fuel cost volatility aside, medical insurance has consistently been the fastest growing cost for employers.

What is driving premium rates? The compounding effect of the higher costs for specific health services (unit costs) and the increase in the number of services (units) being consumed results in the astonishing average cost per person of $7,600 per year in the United States. The demand for health services has grown so rapidly that the healthcare sector now employs more people in Washington than any other sector.

Don’t expect the trend to change anytime soon. Factors such as the aging population and new high-cost, magicbullet\treatments are widely recognized drivers. The underlying reality that escapes notice is this: The consumption of healthcare services helps people feel better and live longer. What could be a more powerful and more justifiable motivator fueling demand?

The fact that premium costs simply reflect increasing demand for healthcare services is little consolation for employers fighting to manage this troublesome expense. The scale, persistency and seemingly uncontrollable nature of the problem demands cold objectivity and a willingness to introduce cost-reducing change on the part of health insurance purchasers.

GETTING REAL
In the United States, the responsibility for financing health coverage for workers is placed with employers. The cost benefit can be justified by enhancing employee recruitment, improving employee retention, increased productivity and other factors. But, like all forms of compensation, there are reality-based limitations on what an employer can invest in an individual employee. It is relatively easy for employers to establish a rational basis for salary/wage levels and increases. It involves a simple transaction between the employer and employee. The cost of healthcare benefits, essentially another form of employee compensation, functions independently of the interests and fiduciary duty of the employer. Consequently, employers are presented with a frustrating conflict each year when they make a health insurance purchasing decision. The rate increase from the current insurer is usually higher than the budget can support. Employers feel pressured by their own sense of responsibility and employee expectations to absorb the increases and spend more on health coverage than is prudent.

Step one in the health coverage decision-making process is to put emotion aside. Yes, you feel responsible. Yes, you care about your employees and their families. But more importantly, if your business is not profitable, the employees you care about may soon become unemployed.

Step two: Formulate a per-employee per-month budget for health coverage. At this decision point, purchasers often use the current budget and rates as a basis. Stop! That amount may be dictated by the current insurer’s rates and was established without regard for the needs of your business. Simply use your best judgment to establish a conservative amount you know is manageable

Step three: Work with a consulting agent/broker to research health coverage options from various insurers. Review the alternatives and make your selection.

It sounds easy as one-two-three, but it’s not. If it was that easy, you would already be totally satisfied with your current program. To succeed at cost containment, you will likely make a decision that introduces changes including benefit reductions. This means cost-shifting to employees in the form of higher premium sharing or higher co-pays and deductibles.

REACH YOUR TARGET BUDGET

The following are specific tools/considerations you can use in the decision process to reach your target budget:

1) Reduce benefit levels. Lower benefits equal lower monthly premiums. Increasing the office visit co-pay by $10 can cut employee premium by $110 per year. Multiply that by the number of employees to get the full picture. The additional $10 becomes a user-fee at the time of service and since the average employee uses about four office visits per year, the overall savings are obvious. The same advantages apply to increasing deductibles. With higher benefit/higher cost programs, employers are pre-paying for low-cost services that will never be used. Protect your employees from large expenses. Don’t over-pay to cover the smallest expenses.

2) Increase the employee’s premium share through payroll withholding. Employees become more appreciative of cost reduction efforts when they are paying a percentage of the premium.

3) Don’t be afraid to drop your current insurer to get lower rates. Until now, conventional wisdom dictated a premium reduction of 5 percent was needed to justify the workload and paper shuffle required to make a change. Current premium rates render that notion quaint. Rely on a competent broker to do the work and introduce the new program to employees. Use the savings for the care and feeding of your business.

4) Review and reconsider your eligibility criteria. To justify the investment, you really need productive and fully trained employees whose efforts
contribute to your bottom line. For example, increasing your probationary period from 90 days to 180 days better assures a higher level of competence. Similarly, a 40-hour work week requirement yields more productivity than a 30 hour work week.

The relentless annual increases in medical premiums will become even more troublesome with the economy in recession. Based on current trend, it is reasonable to predict your current medical plan could cost $700 per employee per month in five years. You can’t control healthcare consumption or insurance company rating practices. You can control what you agree to spend for health insurance coverage. Every percentage point you shave off medical premiums will yield measurable savings this year and beyond. Get ready to make changes in 2009.