Jay Starkman, CEO of Engage PEO in St. Petersburg, FL, remembersa fifty-person, light-manufacturing company in the southeast UnitedStates.

Ten years ago, health insurance rates were very low, andemployee participation was very high. The employer paid 100 percentof health insurance, dental and vision coverage. “At the time, thatwas expected,” Starkman says. “That was what the company needed todo to be competitive.” All the firm’s employees participated.

As the years went along, employees aged and medical costs wentup. The company began to water down its benefits plans, but costsstill went up by at least 10 to 15 percent every year. In onedramatic year, the increase was between 40 and 50 percent.

The cost of coverage doubled, and the company couldn’t afford tokeep paying for all of it. The owner ultimately worked withStarkman’s company to stabilize costs. He eliminated the company’scontributions to group dental and vision coverage and made otherchanges as well.

Today the company pays 50 percent of workers’ basic healthbenefit, and has a participation level between 50 percent and 60percent. What’s more, Starkman says, “the insurance is much lessinsurance from the perspective of what’s covered, co-payments, andco-insurance.”

This company’s experience isn’t unique. Health care costs areheaded nowhere but up, and employers simply can’t keep offeringtheir workers entirely employer-paid, fee-for-service health careplans.

“When the economy chugs along at 1 [percent] to 2 percent andmedical inflation is 10 [percent] to 12 percent, depending on thecarrier, something has to give,” Starkman observes.

In response, firms pay for less health care on workers’ behalf.That’s the major enrollment theme of 2012, a continuation of trendsthat the industry has seen for multiple years. But even whilecompanies are trying to keep health benefit costs down, some commonplan features are working to drive up costs. That points to issuesemployers could address to further control costs.

Lower participation

The company in Starkman’s example is hardly alone. Many firmsare seeing less participation in group benefit plans. Lowerparticipation numbers drives costs up for the remainingparticipants.

“Less participation means people are adversely selecting,”Starkman says. “Only the people who think they’re going to needmedical insurance are going to take it. Younger, healthier peoplemight not take it, for instance.”

HdHPs a logical choice

According to a survey spring by the Corporate Executive Board, aresearch, analysis, and advisory firm based in Washington, D.C.,many firms offer employees high-deductible health plans, which aretypically cheaper than plans involving participating providerorganizations. The prevalence of plans with annual deductibles of$1,200 or more for individual coverage has roughly tripled inrecent years, according to CEB’s report. About half of health planshave in-network out-of-pocket maximums of $2,500 or more forindividual coverage.

At the same time, companies also offer workers the option of aPPO. Nearly one half of the 2012 plans CEB surveyed require noin-network deductibles. Those plans are more expensive, CEB SeniorDirector Ania Krasniewska says, but employers offer them becausethey’re closer to what employees had in the past and might expecttoday.

Firms pass along the extra expense to workers, who in many casescould avoid the wallet shock by choosing a HDHP instead. Employeeschoose the more expensive benefit out of feeling rather than logic,Krasniewska says, pointing to a CEB survey finding that employeessee plans with out-of-pocket maximums of $2,500 as half as valuableas plans with a $1,000 out-of-pocket maximum. Workers see planswith out-of-pocket maximums of $5,000 or more—which describes abouta quarter of surveyed plans—as having virtually no value.

Risk aversion is the reason behind this sensitivity to a plan’sout-of-pocket maximum, CEB’s report says.

“It’s rare for people to hit those deductibles,” Krasniewskasays. “There’s a real fear of ‘what if this emergency happened tome?’ That fear can distort the value and prevent workers fromseeing that they could be financially better off with thehigh-deductible plan.”

Group participants tend to overbuy insurance, agrees SandyWalters, executive vice president and senior consultant at Kelly& Associates Insurance Group Inc., a broker, distributor andthird-party administrator based in Baltimore, Md. Purchasers oftenbuy more coverage instead of simply saving the money in anemergency fund.

“Let’s say the basic difference between two plans is how theyhandle a hospital stay,” Walters says. “I’m pretty healthy, but I’mstill going to overbuy just in case I’m hospitalized. I mightpre-pay and buy the better insurance rather than save that money tospend in case I’m hospitalized. People buy with their hearts, notwith their heads."

Too cheap

Once employees chose a PPO, typical co-pays for urgent care,emergency room visits, and specialist care might further distortchoices 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 visitan urgent care clinic. It’s 88 percent more expensive to use urgentcare, but the actual difference—$15—is relatively affordable. Thatmay encourage some participants to use urgent care when a primaryphysician would cost both the consumer and the plan lessmoney.

A primary care physician who sees patients regularly is also ina better position to notice health changes before they grow moreserious—and more expensive.

The same problem exists for emergency room co-pays. The averageemergency room visit involves a co-pay of $76, which might not behigh enough to dissuade plan participants from visiting emergencyrooms for problems better solved elsewhere.

Toothaches and sprains are among the 10 most common conditionsfor which Americans visit hospital emergency rooms, the CEB reportsays, and the number of emergency room visits per 1,000 arearesidents has climbed steadily during the past 12 years. A primarycare physician or dentist can address a sprain or toothache moreeffectively and economically.

Plan participants pay a higher co-pay to see a medicalspecialist than to a primary care physician. The co-pays CEBconsidered are about 35 percent higher for specialists than forgeneralists. The difference between the two has been shrinking forthe past two years. Lower specialist co-pays could indicate thereare fewer family and primary care doctors, but also could inviteworkers to see a specialist when a generalist would do.

Too expensive

If co-pays for urgent care, emergency room visits, andspecialists are too cheap, mail-order prescription co-pays are tooexpensive, CEB’s study suggests. At least, that’s what participantsthink. They’re often surprised to pay at least twice the usualco-pay—$37 versus $16 for a brand-name drug or $21 versus $9 for ageneric medication—despite the fact that they’re getting moremedication. Along with the long wait times to fill a mail-orderprescription, larger co-pays are making this benefit lessattractive.

Preventive care

Co-pays are about right for such preventive services asmammograms, colonoscopy, pap smears, cardiac stress tests, andother screenings. That encourages plan participants to catch healthproblems while fixing or managing them is still relativelyinexpensive.

Preventative care for children is particularly affordable inmost plans, with 40 percent of surveyed plans charging $10 or lessfor children’s preventative doctor’s visits, the CEB researchreport says. That’s great, particularly as dependents areresponsible for about 40 percent of plan spending.

The extras

Employees usually pay the whole cost of group dental, vision,disability and life insurance plans. Many workers are struggling toafford core health care coverage, so participation in these extrasis way down, Starkman says. That’s particularly true among thoseearning low- to mid-range wages, he adds.

Gap insurance Growing

Though they may decline group dental and vision coverage, manyemployees do opt for gap insurance, which insures part of a largedeductible. “Sometimes it’s more effective to buy gap insurancethan to buy a different overall policy,” Starkman says.

“Gap insurance can also serve to lower the amount that theemployer has to contribute on a group basis. The employer match,usually a minimum of 50 percent, could be driven down by going witha high-deductible plan and letting employees buy gap insurance,” headds.

The road ahead

Plan costs aren’t headed down anytime soon. In fact, Krasniewskasays, health care reform legislation will tax so-called Cadillacplans.

“Because of the way costs are increasing, PPO plans will beconsidered Cadillac by 2018,” she says. Companies will have toscale back what they’re offering or teach people to use the planbetter, so they’re not using it for things that are reallyexpensive but don’t make sense.”

If the Supreme Court rules against current health reformlegislation, reform will still come, Krasniewska believes.

“Costs are still headed upward. Current health care reform justmakes the problem arrive a little quicker,” she says.

Firms may make high-deductible plans the only health carecoverage plan type they offer. Or they could grant access to agroup PPO plan based on individual worker’s willingness to meetwellness goals or participate in wellness plans.

Employers may also offer less coverage, again as a way to cutback expenses. That could mean less or no coverage for retirees orearly retirees. Spouses might get no coverage as well, or could getcoverage only if they have no other insurance options.

Companies probably won’t have the money to offer plans withlower deductibles. Instead, they might increasingly invest ineducational programs that explain the economic benefits ofhigh-deductible plans and stress the importance of seeing the rightmedical practitioners for a particular ailment or injury.

Average employees might get savings accounts to help cushion bigdeductibles, plus additional wellness plans and metrics designed tohelp 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 toget 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 forcompanies in terms of costs.”

Across the country, companies will hope that she’sright.