You know the drill: spend some extra time and effort to bring down costs for the tiny percentage of participants who spend most of the health claims dollars, and you’ll reduce your insurance expenses.
The problem, says Michael McKenna, president of Partners Benefit Group (www.partnersbenefitgroup.com), is that small or mid-sized fully-insured companies may not be able to effect much of a change, particularly in the early years.
He believes in high-touch, consumer-driven health care and understands why it’s important for the long term. “But in the short term, it isn’t going to pay dividends for small and mid-sized employers,” he says.
“If you’re a large company you’ll see an effect because you have the benefit of a large number of employees, and you’re probably self-insured. If the average return on investment for a robust consumer driven health plan coupled with a wellness program is 10 years, as some say it is, smaller companies can’t wait that long to see a return on their investment.”
Don’t worry, though, says McKenna; you still have options. Instead of focusing on those few, very expensive participants, he wants you to take the opposite view and look at the majority whose claims are very low. Chances are good that you’re overbuying their insurance.
“First, you have to understand where claims come from. Most of the cost of claims comes from relatively few people. So 70 percent of insured members have less than $1,000 of medical claims each year. There isn’t much we can do about the small minority who are responsible for the majority of the costs. And those claims are what insurance is for. What we (Partners Benefit Group) do is show employers how to gain an advantage on that 70 percent who are buying, year after year, way too much insurance.”
Creative Strategy Lowers Overall Cost
It isn’t every day you read about an insurance broker telling people they’re buying too much insurance. But by telling employers this basic truth, McKenna helps them keep their costs down while maintaining coverage for their employees. And best of all, employees don’t feel squeezed by the changes. The secret is using high deductible health plans in a new way.
When companies purchase high deductible health plans (HDHPs), their premiums are often substantially lower than even an HMO plan. You may be thinking that the strategy of offering an HDHP in conjunction with a health reimbursement account (HRA) or health savings account (HSA) is not new, and you’d be right.
McKenna’s strategy, instead, makes use of another provision allowed under Internal Revenue Code Section 105 (which allows HRAs and HSAs). Commonly known as MERPs, or Medical Reimbursement Expense Plans, McKenna prefers the term Participating Funding Arrangement (PFA).
These have been allowed under Code Section 105 for many years, but are not as well-known as the HRAs and HSAs, which became popular thanks to the Medicare Modernization Act of 2003.
While HRAs and HSAs allow employees and/or their employers to save for healthcare expenses in individual, earmarked accounts, a PFA pools employer contributions and applies them against overall insurance premiums.
“The basic difference is that reimbursements from the employer are pooled among all employees, just like an insurance premium would be,” McKenna explains.
“We’re not setting up specific accounts for an employee, as you would under an HRA. We’re spreading the employer-contributed amounts among all employees, creating a working premium rate that’s different from the billed rate from the insurance company.”
Single-Digit Increases In a Double-Digit World
SM Lorusso & Sons Inc., a 100-employee mining and quarrying company, takes advantage of the PFA strategy. While other companies in their Northeastern region have consistently experienced double-digit premium increases year after year, Lorusso’s premium increases have been in the single digits for 5 of the past 6 years, McKenna Reports.
Some companies using a PFA return a portion of the premium savings to employees in the form of deductible coverage.
For example, with a $1,000 deductible, companies may elect to cover the first $500 of medical expenses.
This can help ensure that the younger, healthier employees remain in the plan. Experience shows that among the majority of participants, claims tend to be much less than the deductible amount, on average, but assurance that their employer will cover the first $500 or $1,000 of the deductible provides security for employees concerned about their exposure.
Communicating a PFA arrangement is critical to the program’s success.
It is important that employees understand what drives the cost of insurance, and that they appreciate their role in it. Educating them using a consumerism mind-set allows employees to understand that they can contribute to keeping their costs down in much the same way they do for other goods and services—by shopping.
What to Do Now
McKenna suggests that benefits managers issue a challenge to their consultant or insurance company to explore this kind of creative strategy. It isn’t enough to simply offer two or three stock plans and expect anything to change.
“Traditionally, insurance brokers have been transactional,” McKenna says. “You buy health insurance from a broker who knows the products, can put them on a spreadsheet, and find your new rates.
That just doesn’t cut it anymore. What employers are asking for are consultants and brokers who really understand risk. They should understand health insurance trends, and be students of their industry.”
The first step is often the most difficult. Employers fear moving employees into an HDHP, believing that they won’t understand or appreciate it. Recognizing that, McKenna suggests that companies begin with a deductible of $500 for the first year.
Once they see the results, companies are often anxious to move to a higher deductible. This allows them to save more premium dollars. And when the company reimburses part of the deductible, it goes a long way toward achieving employee appreciation. They usually like an HDHP PPO much more than an HMO with its gatekeeper approach.
And don’t worry that every little thing has to pass through the deductible on today’s HDHPs. “With the Medicare Modernization Act of 2003, there has been an explosion of HDHPs. I have so much product to work with,” says McKenna.
“The Act created the space for HSAs and HRAs and, to its credit, that’s what stimulated a lot of this new product development. Employers shouldn’t be intimidated by the idea of paying some of that deductible for their employees, because in fact, most of the HDHPs we see in the marketplace now are hybrids.
“Many people think that the deductible is going to apply to everything under the sun before the insurance company pays anything. It’s not true.
“Only the HSA-compliant HDHPs work like that. Most of the plans in the marketplace now cover the most common events, like office visits and prescription drugs, right away.
“These things don’t represent the majority of the costs in a health plan, but they’re the most frequently accessed services. And often, they are exempt from the deductible. That mitigates the risk significantly.”