Monday, July 7, 2008

Health Care and Cost Control

These days, everything costs more than it did this time last year. Gasoline has escalated to over $4 a gallon, and the price of oil is above $140 a barrel. Food prices have jumped as well as the costs of delivery to market. Americans are faced with inflationary prices unlike we have experienced for many years. Health care is no different. The good news is that health care premium increases rose at their lowest rate in eight years. The bad news is that the average increase is still more than 6%, and that’s still more than twice the rate of inflation. There are challenges to keep control of costs, especially for employers--benefit cost structure is increasing, and it remains difficult to shift some, much less all, of the increasing costs to employees.

Information available from Workforce Management provide some solutions. Here are a couple of easy ones:
1. Full coverage for preventive care benefits: This one is pretty simple. Drive intermediate to long-term utilization of your health care plan down by providing a healthy stipend ($500 per year? $1,000?) for preventive care covered at 100 percent. Thinking short-term in this area will drive up your long term major-medical costs.
2. Pit the providers against each other: Another simple one. If you have a contract expiring in any area, don’t be a rookie. Shop around. Areas you may not spend much time evaluating, like dental, vision and disability, are especially ripe for providers who are making pushes for market share. That means that there’s usually a provider willing to beat your current rate to get the contract signed.

Next are more complex solutions:
3. Carve out your prescription benefit: "Prescription carve-out" refers to the option for your company to use a pharmacy benefit management company, or PBM, to manage the pharmaceutical component of your medical plans, rather than allowing the traditional PPO or HMO to package it with their services on the medical side. The biggest benefits of the prescription carve-out are volume discounts and formulary design from a big provider like Caremark or Medco. Additionally, if you are a small company on a self-insured PPO/HMO, you may not control the ultimate design of your plan, and as a result may be covering things that aren't ordinarily covered nationally. Control doesn't mean taking benefits away, but it's always good to have options. Formulary design through the carve-out is also the best way to drive up your plan’s generic usage, which is where the real savings are.
4. Phone in the doctor visits: Services like TelaDoc allow your employees (over 12 years of age) to get personalized, non-emergency medical care over the phone without having to go to the doctor’s office. After completing a medical history, services like this allow employees to speak with doctors on an 800 number, receiving diagnosis and prescriptions over the phone for the most common conditions like strep throat, sinus infections or flu. The cost savings look like this: Each call costs roughly $35, versus $85 per doctor’s visit, or a $200 per "doc in the box" visit, or a $400 per emergency room visit. You can do the math.

And finally, here are solutions that could rankle employees:
5. Trust but verify on spousal/dependent coverage: This one’s personal. By doing an audit and forcing documentation that spouses and dependents who are on your plan are actually related to the employee in question, you can drop your total number of covered individuals by as much as 10 percent. Of course, in doing this, you’re presenting employees with a tough message on trust, and the ones who are not being forthright will be the ones with the worst reaction. Related flavors of this intervention include higher premiums for spousal coverage when the spouse is eligible for health care coverage elsewhere.
6. The carrot and the stick, aka penalties for unhealthy employees: With consumerism and wellness programs slow to deliver savings, companies are beginning to replace the carrot with a stick. The only question is the pace of change. The old strategy in this area (the carrot) is to offer financial incentives to employees who have healthy lifestyle habits or who participate in wellness and fitness programs. That’s nice, but it hasn’t always generated the change needed. If you want to be hardcore, you can join an increasing number of companies that take the opposite approach and penalize workers (the stick) for unhealthy choices, such as smoking, by charging them higher premiums. Proceed with caution.
7. Forced mail-order Rx: If you have mail order in place and want to drive up your generic use rate by another 5 percent to 10 percent, gather your courage and force any covered individual with a recurring prescription to use the mail-order system once they’ve made two visits to the pharmacy. You’ll benefit by maximizing your overall percentage of generics under the plan. Warning: While many people think such a move would be welcomed by employees (who wouldn’t want the convenience of mail order, right?), the reality is this option involves employees who ignore your communications being stranded at Walgreens, unable to get their meds. Chaos and escalated calls to your CEO will ensue.

If you are contemplating self insurance as a business owner or small company, be cautioned about some of the risks associated with this cost control measure. gives good advice. Here are three pitfalls that can create unexpected costs:
1. Unfavorable employee mix--
It’s impossible to completely eliminate the risk of unexpected, high-dollar health claims. But here’s a guideline to lower your risk. Health claim stats suggest the “ideal” employee population for a self-insured plan is predominately young, non-smoking and male. If this doesn’t match your employee population, your costs may be higher. Be aware that stop-loss insurance carriers often “laser” those employees considered higher risk. Lasering means that your company would have to pay out much more in claims for these employees before the stop-loss coverage kicks in.
2. Loss of network discounts--
Some firms learned after the fact that going the self-insurance route caused them to lose providers’ network discounts they previously received under fully insured plans. When evaluating plan vendors’ administration-only options, ask: Will the vendor’s network alliances work in your best interests, cost-wise? Will the vendor only oversee claim payments or negotiate to build the best provider network, quality-wise, for your employees? Bottom line: You should get the same kinds of plan designs, networks and discounts as a fully insured plan.
3. Wasteful reinsurance contracts--
If the language of your reinsurance contract doesn’t match your health plan’s summary plan description, you may be paying for coverage you don’t need and can never use. It’s also key to make sure your firm has enough money in reserve to cover run-out claims and other costs that may occur before reinsurance will cover payments. Best practice: annual audits of your financial reserves.

According to, roughly 159 million people get their insurance subsidized by an employer and don't have to pay tax on that subsidy. On average, workers in employer plans pay only 28% - or $2,800 to $3,300 - of the premiums for family coverage and 16% (roughly $600 to $700) for single coverage premiums. By contrast, the 15 million who buy health insurance on their own don't get any subsidies or tax breaks, unless they're self-employed. Right now, whether a company offers its workers insurance - and offers to pay for it - is voluntary.

But maybe health care is different-something we hear often these days. Except when it isn't, as reported by the U.S. Chamber Take LASIK eye surgery, for example. Doctors providing this service are constantly upgrading their expensive machines, looking for ways to attract customers and providing additional services. Still, the prices have fallen significantly since these procedures first became available. Why? The primary reason is that patients are paying out of their own pockets and demand value for their dollars. Herein lies the fundamental economic principle that explains why health care costs are growing much faster than the rate of inflation: cost insulation. In the vast majority of cases, when a patient goes to the doctor, hospital, or pharmacy, someone else-i.e., the employer, health insurer, or government-is paying the bill. And when someone else is paying the bill, consumers have little reason to care about the costs. When we as consumers are insulated from the cost of our purchasing decisions, we tend to consume more.

In this Chamber report by the Council for Affordable Health Insurance, we will never get health care costs under control until consumers have a reason to seek value-just as they do in every other sector of the economy. And the only way we're going to do that is to remove some of the cost insulation that pervades the health care system. Consumers in most markets can compare and contrast the costs and benefits between products and services and determine for themselves whether one is providing additional value. And since they are paying for the product or service themselves, they have an economic incentive to get value for their dollars. However, in most medical care there are no prices. And for good reason: Consumers don't really care about prices because they aren't paying the bill! As a result, most medical providers have no idea what it costs them to provide a particular service, and patients who want to know can't find out.

How do we move to a system where patients are seeking value for their health care dollars but are still protected from the financial devastation that could come from a major accident or illness? Actually, many employers have already discovered the answer. The U.S. Chamber report goes on to say that some companies are shifting away from traditional health insurance to a high deductible health insurance policy, in conjunction with a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA).

The high deductible policy costs less-often significantly less-than a traditional policy, allowing the employer to give part or all of those savings to the employee. With the HSA, for example, employers might provide a policy with a $5,000 deductible for a family, but they put $3,000 or $3,500 into a tax-free personal account that belongs to the employee. Money left over in the HSA at year's end rolls over and grows with tax-free interest. Because that money belongs to the employee, he or she has an economic incentive to ask the question that is seldom asked today: Doctor, how much will that cost? Should a major accident or illness occur, health insurance kicks in to cover those costs and protect the employee's assets. And this approach appears to be working. Employers offering so-called consumer driven policies are seeing annual premium increases in the low single-digit range; those with traditional policies have seen average increases of 8% to 14% over the past several years.

There are definite ways to control costs in health care. The issue is whether you are willing to make the choices that are required to manage them. Some are easy, and some are not. Saving money, though, is always in your best interest.

Until next time. Let me know what you think.

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