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Malpractice and Best Practice

The defined-contribution approach makes its way to health-care plans. But will it put employees at risk?
David M. Katz, CFO.com | US
November 5, 2001

For Jim Hauseman, it was one premium hike too many.

In April, InSport International, a privately held distributor of athletic clothing, received a renewal offer for the company's health-maintenance-organization (HMO) coverage. Hauseman, CFO at InSport, says that the provider, Regence BlueCross BlueShield of Oregon, informed the company that it was seeking a 13 percent increase in plan premiums.

Since double-digit increases in health-benefit plans had been widely predicted, the 13 percent markup didn't come as much of a shock, recalls Hauseman. Certainly, Regence's offer looked pretty good next to the 80 percent hike that at least one other insurer requested.

But the Blues rate hike was the third increase in four years, with each one prompting InSport to change its employee health plan. In 1997, a 30 percent rise in premiums for its indemnity policy forced the company to switch to a cheaper, preferred-provider-organization (PPO) plan. But in 2000, Regence felt the PPO coverage merited a 30 percent price bump-up in rates. So, InSport migrated to HMO coverage, and a gentler 8 percent bump-up.

But while InSport's health-benefit premiums were skyrocketing, the company's sales remained flat. (See "Benchmarking Your Doctor Bills.)" Meanwhile, employees began grumbling about the ever-narrowing choice of doctors and hospitals that came with each change in medical plans.

Faced with shrinking provider lists — and mushrooming premiums — managers at the Beaverton, Oregon-based company began to seek out alternatives. After several months of searching, the company finally settled on a defined-contribution (DC) health plan put together by MyHealthBank, a Portland-based benefits-services company. (Regence remains the insurer.)

Also known as "consumer-driven" or "self-directed" approaches, DC medical plans represent the latest attempt by companies to get workers to spend less on health care, and hence, help employers hold the line on costs. In contrast to traditional plans, in which employers dole out a percentage of the premium regardless of increases, DC plans typically require sponsors to contribute fixed dollar amounts each month into employee health-benefit accounts. Workers can then choose how the money is spent, with unused dollars often staying in their accounts from year to year. In that way, DC medical plans are similar to medical savings accounts for individuals. (While InSport's plan doesn't yet have a provision enabling employees to retain plain dollars from year to year, it will probably will have one eventually, says Hauseman.)

Under InSport's new plan, the company pays $237 a month for medical and dental coverage for each of its 36 employees. Workers can choose among three plans: an HMO, which costs the full amount and carries a $10 copayment provision but no deductible; a PPO, costing $230 a month but carrying a deductible; or indemnity coverage, for $250, with the employee paying the extra $13. Family coverage is available for roughly double those amounts, with workers picking up the difference.

Hauseman says he's relieved not to be getting an earful from workers about the lack of providers in the plans. Employees now grasp that "they have to deal with the choice of plans," he says. The CFO admits that the financial gains of the new plan have so far been hypothetical. After all, the HMO coverage offered under the DC plan costs the same as it would have if it were offered alone.

The big difference is that if the insurer quotes a big premium increase, InSport wouldn't automatically assume the entire increase. "Next year, that could be a big cost advantage," says Hauseman, who thinks premiums could rise well above its $237 monthly contribution. "We can review our contribution," he adds. "If it goes to $260, we could cap it where we want."

Second Opinion
To be sure, DC health-care accounts are beginning to catch on with plan sponsors. According to a recent survey of 200 employers by Watson Wyatt Worldwide, 20 percent are at least somewhat likely to offer such plans in 2002.

Some executives worry, however, that heavy-handed approaches could put employees at too great a risk. Given a small, fixed amount of cash to pay for health benefits, some employees might end up with too little coverage for serious illnesses. "If a child needs special care, that can burn through $2,000 pretty quickly," notes Robert Greving, senior vice president of finance for UnumProvident in Chattanooga, Tennessee

Recently, Greving considered a DC approach after UnumProvident was socked with a premium hike in the mid-teens. But it's "probably a bit radical at this point, he says. Instead, UnumProvident is looking at doing some tinkering with the design of its current plan, which provides HMO or PPO coverage for the company's 10,000 employees. UnumProvident might, for instance, limit emergency-room coverage or increase copayments for doctor visits.

Indeed, there are many smaller cost-control steps that employers can take short of total plan overhaul, says Randall Abbott, a senior consultant with Watson Wyatt in Philadelphia. One is to drive a harder bargain with their insurers. Employers can, for instance, benchmark the amounts that their health-plan vendors are charging for administrative services against what other vendors are charging. "Many large health plans have become complacent" about keeping their own costs in line, he adds.


Self-insured employers can also look at what they're paying for stop-loss insurance, which caps what they must pay out for health claims. Stop-loss health carriers have been asking for 25 percent to 35 percent premium increases, says Abbott, and CFOs might consider lowering their premium costs by assuming more risk. Along with their risk managers, finance chiefs should try to locate a sweet spot — a price where premiums are low enough but exposure isn't too great, he advises.

Businesses can also try to limit plan outlays for prescription drugs, widely seen as the most unbridled health-benefit cost, suggests Abbott. Possible steps include encouraging employees to choose their medicines from a "formulary," or list of preferred drugs, and installing percentage coinsurance provisions rather than dollar copayments. (See "The War on Drug Costs.")

Finally, to avoid costly payment delays, it's a good idea to keep an eye on the financial health of managed-care plans. In a study released last month, Weiss Ratings found that 40.9 percent of 469 HMOs are vulnerable to financial woes if the economic downturn persists. Abbott says employers that offer a "potpourri of small HMOs around the country" should be particularly on the alert. "You just can't take for granted that all of these plans will weather a recession."




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