General Practice, Solo & Small Firm DivisionMagazine
How to Cut Your Health Insurance Costs
By Phillip M. Perry
How can you reduce your health insurance costs? Most law firms are still asking that question.
"Health insurance continues to be at or near the top of the list of our clients’ concerns about managing business costs," says Rick Elliott, national practice leader at Johnson & Higgins, a consulting firm based in Nashville, Tennessee.
No wonder. Small businesses with fewer than 500 employees paid $3,452 per worker for health insurance in 1994, according to Foster Higgins, a New York consulting firm. That figure was an increase of 6.5 percent over the previous year.
However, there’s a silver lining in the health insurance cloud bank. Businesses with more than 500 employees experienced a 1.9 percent decrease in health insurance costs in 1994, to $3,741 per employee. "Nearly one-third of all large employers made significant changes to their health benefits programs in 1994," says Elliott. "They typically added a managed care plan or switched health care vendors."
If you want to tear a page from the big company business manual, you need to know what steps to take.
• Join a managed care organization, which controls medical costs and therefore premiums.
• Unite with other small businesses in a "purchasing alliance" for greater clout in buying health insurance.
• Shift some health insurance costs to employees.
Join a managed care organization. According to Foster Higgins, 67 percent of covered employees belonged to a managed care program in 1994, up from 52 percent the year before. Nationally, small businesses using these programs can save from 10 to 30 percent over traditional insurance plans, according to a spokesperson for Kaiser Permanente, a health maintenance organization based in Oakland, California.
You need to "comparison shop" these insurance products. Don’t accept the first offer that comes along.
Managed care organizations have been successful because they contract with a pool of doctors to provide service for a set annual fee per patient, or a salary or a deeply discounted schedule of fees for services rendered. In turn, the doctors benefit because they are handed a set number of new patients. The two most common forms of these groups are health maintenance organizations and preferred provider organizations.
If you join a health mainten-ance organization (HMO), your employees are provided with all health care, including annual physicals, at no charge over your monthly premium. Your employees will need to use a selected group of doctors and hospitals with which the group has contracted to provide care at predetermined rates. Frequently, an employee selects a primary care physician, then must obtain permission from that doctor prior to seeing a specialist, entering a hospital, or obtaining surgery. A patient who fails to obtain permission to use services outside the network must pay fees for those services, unless otherwise covered (a freedom plan).
Your employees may have resisted HMO’s because participants must use the physicians who belong to the network. That’s changing. More HMO’s now offer so-called "out-of-network" options to participants. Often referred to as point-of-service, or POS, plans, these arrangements reimburse part of the expenses of patients who use physicians not in the HMO network.
If you join a preferred provider organization (PPO), the setup is a little different. A PPO usually does not offer free annual check-ups and basic medical care for a set monthly premium. Instead, your company receives a deep discount if your employees go to physicians belonging to the PPO network. You get a smaller discount if the employees go to other doctors.
Unlike HMO’s, PPO’s usually do not ask members to pick a primary physician who operates as a gate keeper for more expensive specialist services. Therefore, PPO’s are not viewed as being as effective in controlling costs.
Unite with other businesses in "purchasing alliances." You can join forces with other small businesses in "purchasing alliances" to gain the same buying power as large corporations. Often, chambers of commerce instigate these purchasing alliances. One of the most successful of such groups is the Council of Smaller Enterprises, sponsored by the Cleveland Chamber of Commerce. It now has 12,000 employers, with an average of 6.5 employees.
Another alliance is the Midwest Business Group on Health, a Chicago-based, not-for-profit coalition of 140 businesses in 11 states. "We have found that employers can save 35 percent on in-patient care and 20 percent on out-patient care through group purchasing plans," says Larry Boress, vice president of member services for the Chicago group.
Expect to incur some time and expense to get the ball rolling. Says Scott Lyon, director of the Council of Smaller Enterprises (COSE) in Cleveland: "What’s holding a lot of chambers back is the up-front capital required to get into this business. Money is needed to get staff in place, have strong contracts to govern relationships and hire the right kind of management consultants."
Beware of one potential negative with purchasing alliances: Typically, a new group comes up with premiums geared to allow all employees to participate. The danger is that those companies with low claims and a young work force will increasingly see they can get a better deal on their own. As a result, over time these groups can be left with all the bad risks. Solution: Tie the member companies in for some period of time more than a year, and establish a penalty for getting out.
Before joining a purchasing alliance, make sure it has good management. Watch out for fly-by-night operators that move into a community and offer cheap group insurance, then disappear after pocketing the premiums, leaving employees stranded with no health insurance.
Involve your employees. "Shifting more health insurance costs to the employee has become a more common way to control expenses," says Rae Lee Olson, vice president of Vita Insurance, Mountain View, California.
Require the employee to:
• Pay more of the premium;
• Pay a higher deductible before insurance kicks in;
• Pay a greater portion of the coinsurance.
Having the employee pay more of the premium reduces your costs directly. "Sometimes you can implement Section 0125 of the Internal Revenue Code," says Patrick Ashe. "These will allow the employee to pay the premiums on a pretax basis. The result is a seamless increase for the employee."
Establishing a deductible, or increasing the one you have, will discourage employees from engaging in unneeded health services. When a deductible is increased, the employee is asked to pay more of the health care bills before your insurance plan kicks in with payments. This is one of the most effective cost-shifting tactics. If you don’t want to put too much of the burden of a high deductible on your employees, consider paying part of it in company funds. The reduction in premium costs probably will still allow you to save money.
Have employees pay more in terms of coinsurance. Olsen favors a percentage copay over a flat fee, because the former communicates to employees just how much the employer is contributing. "We recommend a 10-percent or 30-percent contribution," says Olsen. "That lets the employee know how much the employer is paying, and it’s high enough so that someone who doesn’t need the coverage won’t take it. But it’s not unduly punitive."
Finally, take a new look at any parts of your plan that can be eliminated.
Conclusion. If you develop the right game plan and communicate the right way with your employees, you can rein in these costs before they erode your bottom line.
Phillip M. Perry is a freelance writer who specializes in business and finance.
- This article is an abridged and edited version of one that originally appeared on page 38 in Law Practice Management, October 1997 (23:7).