Employees Vs. Employers

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As the cost of medical benefits soars, employers are exploring a variety of strategies-some draconian, others incremental-to maintain medical coverage. And, at the same time the pressure to find creative financial solutions is mounting, evidence of the critical role of health insurance is coming into sharper focus.

Employers have long accepted the idea that health coverage is a key component of total compensation. Now that research is increasingly illuminating the role of health insurance in assuring worker health and productivity, companies that may have been considering drastically cutting or eliminating medical benefits are rethinking the decision.

Search for alternatives

Against this backdrop, few employers that can afford to provide at least some basic level of health insurance appear ready to drop it altogether. "That's not something we'd even consider," says Pamela Perrott, senior vice president of human resources for Markel Corp., a property casualty insurance holding company in Glen Allen, Virginia, that has 1,100 employees in the United States and 600 in other countries.

Like many other companies, Markel has been experimenting with new health-benefit options and pricing structures, Perrott says. With annual average health-benefit costs jumping 13 to 15 percent, employers have no choice but to consider alternatives. Hewitt Associates, a consulting firm headquartered in Lincolnshire, Illinois, recently polled 702 corporate HR executives about their health-plan experience and strategies. They concluded that most employers "face cost increases that exceed their budgets and ability to pay."

The severity of the financial challenge posed by rising health-plan costs, as well as the range of responses, appears to vary significantly according to employer size. In general, larger employers aren't in as dire financial straits as smaller firms, and aren't considering as radical a response.

The Hewitt report shows, for example, that 43 percent of the employers surveyed with more than 5,000 employees said that their primary focus was to "increase employee premium contributions" or to effect other forms of cost-sharing through changes in plan design. By contrast, only 17 percent of the respondents indicated that their primary focus was to "implement new delivery systems and purchasing models."
Large employers did, however, report "moderate interest" in other approaches, including disease management, health-improvement programs, and simply changing health plans altogether.

No magic answers

"While the pressure to control costs and embrace change is clear, the silver bullet is not," the report concludes. Nearly 60 percent of survey respondents said they're simply making "incremental benefit-design and contribution St. Rita's also has increased overall cost-sharing with employees this year-although not enough to stir any significant protest. Employee surveys have, however, revealed some dissatisfaction with St. Rita's overall benefit plan. "Employees are influenced by the local climate," Wong says. St. Rita's is forced to compete, at least to some degree, with large unionized industrial employers such as the Ford Motor Corp. that offer very generous benefits.

So unless the financial pressure becomes intolerable, Wong says, he'll resist making any radical changes to St. Rita's health plan.

Pressure on small employers

In contrast, many smaller employers have had no choice but to make dramatic changes just to continue to offer employee health coverage. For example, double-digit jumps in health-benefit costs forced an Indiana newspaper publisher to jack up deductibles by 150 percent to $500 last year, says Nancy Siebel, HR manager for Kendallville Publishing Company. Deductibles went up another 15 percent this year.
In response to those and other changes to the plan, several married employees dropped the coverage and relied on their spouses' plans. After recovering from the shock of higher prices, and realizing that it was better than most of the alternatives, some returned to the plan.

Employers like KPC have discovered that small isn't beautiful when it comes to buying health insurance. Recent research from the Kaiser Family Foundation and the Health Research and Educational Trust reveals that the smaller employers' health costs are climbing, on average, more rapidly than those of larger firms. Last year, for example, companies with fewer than 10 workers saw their premiums jump by an average of 17 percent, versus 11 percent for employers with between 50 and 200 workers.
Not surprisingly, the proportion of small employers offering health benefits is far smaller than that of large employers. Sixty-five percent of employers with fewer than 200 employees surveyed by Kaiser offered health benefits last year, in contrast to 99 percent of employers with more than 200 workers. And the percentage of small employers offering health benefits dipped 2 percent from the previous year, an ominous trend, according to health-coverage advocates.

The group also observed the growth and evolution of "voluntary" employee-paid supplemental insurance products. KPC is considering making new voluntary supplemental insurance available to its employees, Siebel says. Several of the publisher's employees already own cancer insurance policies purchased in a successful voluntary insurance program several years ago, she says.

Supplemental insurance plans

One new category of voluntary coverage is "medical gap" insurance-the industry's response to the trend toward higher and higher deductibles on health insurance. "There are employers introducing $3,000 and $5,000 deductible plans," says John Penko, chief marketing officer of Manhattan Insurance Group in Houston.
Boosting deductibles not only dramatically reduces employers' costs but also returns health insurance to its origins as a safeguard against the financial consequences of catastrophic medical events. Workers unaccustomed to having to periodically pay out large sums before their health-benefit coverage kicks in are the target of new "medical gap" policies such as AFLAC's Personal Sickness Indemnity Plan, Colonial Life & Accident's Medical Bridge policy, and Manhattan Insurance Group's Med Choice product.

Although by definition the cost of "voluntary" insurance is borne by the employee, nothing prevents the employer from helping to defray some of the costs of these plans.

These policies help defray the cost of medical expenses such as doctor's office visits, certain hospital expenses, and outpatient surgery services up to relatively low fixed ceilings intended to approximate the employee's out-of-pocket obligations under his or her employer-paid plan.

"These aren't major medical plans and won't take care of a catastrophe, but they do help workers manage their expenses," Penko says.
Although by definition the cost of "voluntary" insurance is borne by the employee, nothing prevents the employer from helping to defray some of the cost of these plans. Cherie Tibbits, vice president of marketing and product development for Colonial in Columbia, South Carolina, says that "a lot of employers" are contributing to the cost of supplemental medical plans. In some cases employers can come out ahead of the game by raising deductibles on their basic health plans dramatically, then contributing to the cost of gap policies, she says.


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