Viewpoints

Employees Confront Critical Health Care Assessments

Gerald Archibald

Originally Published In:
ROCHESTER BUSINESS JOURNAL
March 2005
Author: Gerald J. Archibald, CPA

“I don’t want to achieve immortality through my work, I want to achieve it through not dying.”  Woody Allen

Aging, Alzheimer’s, AIDS, Alcohol, Abuse.  The five A’s of healthcare costs which represent the hidden drivers of double digit health insurance premium increases.  Three factoids relevant to the discussion below are:

• On balance, a population of individuals over the age of 65 consumes three times the annual amount of healthcare costs compared to a population of individuals under the age of 65.
  
• For the vast majority of the population in the U.S., more than 50% of your entire lifetime consumption of healthcare costs and services is incurred in the last year of life on earth.
  
• A recent study announced that the average hourly wage for a U.S. autoworker is now $27 per hour compared to the average autoworker in Mexico at $3.50 per hour.  This comparison is without fringe benefits like healthcare and retirement.

How would you like to achieve a 25% reduction in your organizations healthcare fringe benefit costs?  Read on.

Something has to change in our delivery and consumption of healthcare in the U.S.  I am pleased to report that change is occurring in generally a positive direction.

Now is the time for every employer to evaluate its employee health insurance offerings.  Health insurance costs for employees’ continues to represent one of the fastest growing fringe benefit components for most employers.  Statistics from Excellus Blue Cross indicated that premium increases over the past eight years have exceeded 10% annually.  However, salary increments for employees have generally averaged 5% or less in a relatively low inflation environment.  Now many employers have asked the question, “What is going on here”?

There are essentially five key variables which drive the excessive increase in health insurance costs.  They are:

• Improvements in medical technology typically increase cost and quality/length of life
  
• Pharmaceuticals and drug therapies continue to represent a significant component of the increase in healthcare costs
   
• Increasing patient demands for more care regardless of its cost and efficacy
  
• Insurance benefit structures (low co-pays and deductibles) that promote increased patient utilization
  
• Excessive advertising and promotional marketing by drug manufacturers and insurance companies

You will note that the five variables do not include payments for services provided by physicians, hospitals and other healthcare providers.  Cost increases in payment rates to healthcare providers have actually significantly lagged the rate increases in premiums by a rather substantial margin.  Local providers have received annual price increments between two and five percent, generally, over the past five years.  Go to RC3PO.com for further information regarding health insurance premium increases in relation to provider payment rates and further analysis on the healthcare conundrum.

Healthcare providers are generally responsible and obligated to provide services under New York State law to individuals that present themselves with conditions that require healthcare services.  While certain providers have certain exceptions related to the obligation to provide care, it is generally understood in our society that if an individual requires healthcare services, there is a provider willing to care for the patient.

So, the “managed care” era appears to be winding down as we proceed to the next solution for controlling healthcare costs.  Consumer driven health plans (CDHP) represent the latest attempt at effecting meaningful change in the healthcare cost delivery structure that represents a significant competitive global disadvantage for American produced goods and services.  CDHP benefit structures are based on the objective of employers reducing their health insurance premium costs for their employees, while making the employee actively participate in healthcare purchasing decisions.  Healthcare cost reduction for the employer is accomplished in a CDHP program through the following elements that are common components of CDHP product offerings.

• Shifting of certain healthcare costs from the employer to the employee’s wallet.
  
• Implementing higher co-payments and deductibles that represent the patients/employees responsibility.
  
• Establishing a high deductible health insurance benefit package that covers significant healthcare events at full coverage or with additional co-payment responsibility by the employee.

CDHP’s are a component of new health insurance product offerings generally referred to as high deductible health plans (HDHP).  There are many variations of benefit structures and plans being offered in both the CDHP and HDHP product arena by the insurance companies growing market share and operating in the Greater Rochester area, Preferred Care and Aetna.  This shift in the type and structure of benefit plan offerings is occurring rapidly and requires an annual assessment by employers to determine which benefit offerings fit their employee needs, employer fiscal affordability and overall approach to employer provided health insurance.  Since most employers introduce new benefit plan offerings on January 1 of each year, we are rapidly approaching the open enrollment periods for new health plan offerings, which generally are conducted, from October 1 through December 31 of each year.  This column is a timely reminder that the months of August and September are the most appropriate time for employers to evaluate their health insurance benefit structures and related costs for purposes of making changes in health insurance benefit plan offerings.

In many respects, this recent trend towards HDHP represents a repeat of past insurance benefit offerings.  When I began my career at Arthur Anderson in 1973, my health insurance was provided by Connecticut General Insurance with no coverage for primary care physician services, drugs, 80% coverage for hospital inpatient stays and a maximum deductible responsibility for me to pay out-of-pocket totaling $500 each year.  The 30-year managed care experiment has been a dramatic failure in most respects.  This is primarily due to the creation of an expectation in the employee/patient that all services were covered in full with very modest co-pay responsibilities ($5-$10 per physician office visit) and virtually no deductible requirements for out-of-pocket costs to the employee.  In addition, prescription drug benefit riders were added that did not exist in the pre-managed care indemnity products.

So, we have finally come to the realization that what insurers have been offering in managed care products is no longer fiscally affordable to the employer, particularly in a low inflation environment of 2-4% revenue growth each year.

My personal favorite and recommendation for serious consideration in the area of consumer directed health plans is the Health Savings Account (HSA) or the Health Reimbursement Arrangement (HRA).  If your looking for external validation of this preference, one need look no further than the employees of Aetna, Inc.  Of the 28,000 Aetna employees in the U.S., 21,000 of them are enrolled in a HSA or CDHP product offering.  This is significant in that if the insurance company believes that HSA and CDHP product offerings are the best fit for the employer and the employee in the Aetna situation, it provides a clear statement that each and every employer must seriously consider.

There is a tremendous amount of information available on HSA and HRA product offerings from the insurance companies as well as the Internet.  In brief, the overall structure of an HSA account includes the following components:

• A Health Savings Account (HSA) is a special account owned by an individual where contributions to the account are to pay for current and future medical expenses
  
• HSA’s are used in conjunction with a “high deductible health plan” (HDHP).  HDHP insurance does not cover first dollar medical expenses, except for preventive care.
  
• HSA’s were created in Medicare legislation signed into law by President Bush in December 2003.  HDHP plans in conjunction with an HSA must have a minimum deductible for 2006 of $1,050 for a single individual and $2,100 for family coverage.  These amounts are indexed annually for inflation.
  
• The annual out-of-pocket (including deductible and co-pays) cannot exceed $5,250 for a single individual or $10,500 for family coverage.

In addition to the insurance companies mentioned above, the best website I have found for describing HSA’s and HDHP’s is at www.treasury.gov/offices/public-affairs/hsa.  This website has a very useful matrix for purposes of comparison of HSA and HRA arrangements.

Essentially, the benefit to the employer is achieved through reduced health insurance premium costs given the increases in co-pays and deductibles.  The employee benefits from the funding of a portion of the HSA account balance by the employer supplemented by employee contributions.  One of the key features of the HSA model is that the accounts are similar to individual retirement accounts in that they are both portable with employees changing employers and do not include the “use-it or lose-it” requirement that is a negative feature of flexible spending account (FSA) arrangements.

In a nutshell, a consumer driven health plan like an HSA coupled with an HDHP provides the employee with greater freedom in spending healthcare dollars the way the employee chooses.  The typical plan has common components:

• Member responsibility for certain upfront medical costs
  
• An employer funded account that the employee may use to pay these upfront costs
  
• Catastrophic health insurance coverage with a high deductible
  
• Employees and their family members receive full coverage for in-network preventive care

Competition is heating up in the insurance industry, as more and more employers are demanding a shift from managed care insurance products to consumer driven health plans.  2007 will represent the first significant opportunity for employers to evaluate and assess consumer driven health plans with product pricing that will encourage and support a change from your historical benefit offerings.

The strategy for each and every non-profit organization should be to direct the human resources/benefit director to conduct an evaluation and assessment of product offerings in the CDHP area by October 1, 2006.  A side-by-side comparison of the current benefit plan offerings in relation to the CDHP offerings will enable senior management and the Board to determine whether a CDHP product offering is right for your situation.

Given the variables and the cost drivers increasing our healthcare costs and insurance premium increases, this assessment of CDHP plan offerings should be conducted on an annual basis by all employers.

Forget about the afterlife.  Focus on the opportunities created by CDHP and HSA plans for more control over the rate of increase in healthcare costs as well as a reduction in your employer provided healthcare fringe benefits.

In the immortal words of Woody Allen,

“The chief problem about death…is the fear that there may be no afterlife, a depressing thought, particularly for those who have bothered to shave…I do not believe in an afterlife, although I am bringing a change of underwear.”

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