Jay Starkman, CEO of Engage PEO in St. Petersburg, Fla., remembers a 50-person, light-manufacturing company in the southeast United States.
Ten years ago, health insurance rates were very low, and employee participation was very high. The employer paid 100 percent of health insurance, dental and vision coverage. “At the time, that was expected,” Starkman says. “That was what the company needed to do to be competitive.” All the firm's employees participated.
As the years went along, employees aged and medical costs went up. The company began to water down its benefits plans, but costs still went up by at least 10 to 15 percent every year. In one dramatic year, the increase was between 40 and 50 percent.
The cost of medical coverage had doubled, and the company couldn’t afford to keep paying for all of it for every employee. The owner ultimately worked with Starkman’s company to stabilize costs. He eliminated the company’s contributions to group dental and vision coverage and made other changes as well.
Today the company pays 50 percent of workers’ basic health benefit, and has a participation level between 50 and 60 percent. What’s more, Starkman says, “the insurance is much less insurance from the perspective of what’s covered, co-payments, and co-insurance.”
This company’s experience isn’t unique. Health care costs are headed nowhere but up, and employers simply can't keep offering their workers entirely employer-paid, fee-for-service health care plans.
“When the economy chugs along at 1 to 2 percent and medical inflation is 10 to 12 percent, depending on the carrier, something has to give,” Starkman observes.
In response, firms are paying for less health care on workers’ behalf. That’s the major enrollment theme of 2012, a continuation of trends that the industry has seen for multiple years. But even while companies are trying to keep health benefit costs down, some common plan features are working to drive up costs. That points to issues employers could address to further control costs.
The company in Starkman’s example is hardly alone. Many firms are seeing less participation in group benefit plans. Lower participation numbers can actually drive costs up for the remaining participants.
“Less participation means that people are adversely selecting,” Starkman says. “Only the people who think they’re going to need medical insurance are going to take it. Younger, healthier people might not take it, for instance.”
High-deducible plans are logical—and still unpopular
According to a survey done this spring by the Corporate Executive Board, a research, analysis, and advisory firm based in Washington, D.C., many firms offer employees high-deductible health plans, which are typically cheaper than plans involving participating provider organizations. The prevalence of plans with annual deductibles of $1,200 or more for individual coverage has roughly tripled in recent years, according to CEB’s report. About half of health plans have in-network out-of-pocket maximums of $2,500 or more for individual coverage.
At the same time, companies also offer workers the option of a PPO plan. Nearly one half of the 2012 plans that CEB surveyed require no in-network deductibles. Those plans are more expensive, CEB Senior Director Ania Krasniewska says, but employers offer them because they’re closer to what employees have had in the past and may expect in the present.
Firms pass along the extra expense to workers, who in many cases could avoid the wallet shock by choosing a high-deductible plan instead. Employees choose the more expensive benefit out of feeling rather than logic, Krasniewska says, pointing to a CEB survey finding that employees see plans with out-of-pocket maximums of $2,500 as half as valuable as plans with a $1,000 out-of-pocket maximum. Workers see plans with out-of-pocket maximums of $5,000 or more—which describes about a quarter of surveyed plans—as having virtually no value.
Risk aversion is the reason behind this sensitivity to a plan’s out-of-pocket maximum, CEB’s report says. “It’s rare for people to hit those deductibles,” Krasniewska says. “There’s a real fear of ‘what if this emergency happened to me?’ That fear can distort the value and prevent workers from seeing that they could be financially better off with the high-deductible plan.”
Group participants tend to overbuy insurance, agrees Sandy Walters, executive vice president and senior consultant at Kelly & Associates Insurance Group, Inc., a broker, distributor and third-party administrator based in Baltimore, Md. Purchasers often buy more coverage instead of simply saving the money in an emergency fund.
“Let’s say the basic difference between two plans is how they handle a hospital stay,” Walters says. “I’m pretty healthy, but I'm still going to overbuy just in case I’m hospitalized. I might pre-pay and buy the better insurance rather than save that money to spend in case I’m hospitalized. People buy with their hearts, not with their heads.”
Once employees chose a PPO health care plan, typical co-pays for urgent care, emergency room visits, and specialist care may further distort their choices in ways that increase costs.
The average plan, according to the CEB report, has a co-pay of $17 to see a primary care physician, and a co-pay of $32 to visit an urgent care clinic. It’s 88 percent more expensive to use urgent care, but the actual difference—$15—is relatively affordable. That may encourage some participants to use urgent care when a primary physician would cost both the consumer and the plan less money.
A primary care physician who sees patients regularly is also in a better position to notice health changes before they grow more serious—and more expensive.
The same problem exists for emergency room co-pays. The average emergency room visit involves a co-pay of $76, which may not be high enough to dissuade plan participants from visiting emergency rooms for problems better solved elsewhere.
Toothaches and sprains are among the ten most common conditions for which Americans visit hospital emergency rooms, the CEB report says, and the number of emergency room visits per 1,000 area residents has climbed steadily during the past 12 years. A primary care physician or dentist can address a sprain or toothache more effectively and economically.
Plan participants pay a higher co-pay to see a medical specialist than to see a primary care physician. The co-pays CEB considered are about 35 percent higher for specialists than for generalists. The difference between the two has been shrinking for the past two years. Lower specialist co-pays could indicate that there are fewer family practice and primary care doctors, but could also invite workers to see a specialist when a generalist would do.
If co-pays for urgent care, emergency room visits, and specialists are too cheap, mail-order prescription co-pays are too expensive, CEB’s study suggests. At least, that’s what participants think. They’re often surprised to pay at least twice the usual co-pay—$37 versus $16 for a brand-name drug or $21 versus $9 for a generic medication—despite the fact that they’re getting more medication. Along with the long wait times to fill a mail-order prescription, larger co-pays are making this benefit less attractive.
Preventive care: Attractively priced
Co-pays are about right for such preventive services as mammograms, colonoscopy, pap smears, cardiac stress tests, and other screenings. That encourages plan participants to catch health problems while fixing or managing them is still relatively inexpensive.
Preventative care for children is particularly affordable in most plans, with 40 percent of surveyed plans charging $10 or less for children’s preventative doctor’s visits, the CEB research report says. That’s great, particularly as employee dependents are responsible for about 40 percent of plan spending.
The extras: Fewer takers
Employees usually pay the whole cost of group dental, vision, disability and life insurance plans. Many workers are struggling to afford core health care coverage, so participation in these extras is way down, Starkman says. That’s particularly true among those earning low- to mid-range wages, he adds.
Gap insurance: Growing popularity
Though they may decline group dental and vision coverage, many employees do opt for gap insurance, which insures part of a large deductible. “Sometimes it’s more effective to buy gap insurance than to buy a different overall policy,” Starkman says.
“Gap insurance can also serve to lower the amount that the employer has to contribute on a group basis. The employer match, usually a minimum of 50 percent, could be driven down by going with a high-deductible plan and letting employees buy gap insurance,” he adds.
The road ahead
Plan costs aren’t headed down anytime soon. In fact, Krasniewska says, health care reform legislation will tax so-called Cadillac plans. “Because of the way costs are increasing, PPO plans will be considered Cadillac by 2018,” she says. Companies will have to scale back what they’re offering or teach people to use the plan better, so they’re not using it for things that are really expensive but don’t make sense."
If the Supreme Court rules against current health reform legislation, reform will still come, Krasniewska believes. “Costs are still headed upward. Current health care reform just makes the problem arrive a little quicker,” she says.
Firms may make high-deductible plans the only health care coverage plan type they offer. Or they could grant access to a group PPO plan based on individual worker's willingness to meet wellness goals or participate in wellness plans.
Employers may also offer less coverage, again as a way to cut back expenses. That could mean less or no coverage for retirees or early retirees. Spouses might get no coverage as well, or could get coverage only if they have no other insurance options.
Companies probably won’t have the money to offer plans with lower deductibles. Instead, they may increasingly invest in educational programs that explain the economic benefits of high-deductible plans and stress the importance of seeing the right medical practitioners for a particular ailment or injury.
Average employees might get savings accounts to help cushion big deductibles, plus additional wellness plans and metrics designed to help them avoid big medical bills.
“The biggest way to affect cost is to get usage under control,” Krasniewska says. If someone’s sick or hurt, we want that person to get care. If not we want them to know about tools that are better. That won’t fix everything, but it will fix a lot of things for companies in terms of costs.”
Around the country, companies will hope that she’s right.