WHEN YOU HAVE A GOOD CLAIMS RECORD AND PREMIUMS STILL SOAR: SELF-INSURANCE
In many circles, self-insurance is regarded as a high-risk gambit best suited for poker players with a steady hand. While self-insurance isn't for every company, if you have a good claims record and more than 100 employees, you should at least consider it -- especially if your premiums are climbing steeply. You may be able to do much better simply by paying the claims as the bills come in. (Companies with fewer than 50 employees are beginning to organize into self-insurance cooperatives; see Hotline, December 1989, [Article link].)
Sandmeyer Steel Co., in Philadelphia, found itself in that position five years ago. Its annual claims, or loss ratio, were about 70% of the premiums it was paying, which means that the insurance carrier was keeping 30% of the premiums for administrative expenses and profits. Since an 80-20 loss ratio is usually considered fair, the insurer was keeping more than its share. The company, whose 140 employees make stainless-steel products for manufacturers, decided to self-insure.
President and CEO Ron Sandmeyer reports that the company has saved at least 10% a year on its health-care costs. The biggest saving, 5% or more, comes from the lower cost of administration -- third-party administrators, companies that handle paperwork on self-insured plans, charge up to half the rate of insurance companies. In addition, self-insured companies don't pay state tax on premiums or cover certain state-mandated insurance benefits, such as psychiatric care, though they may elect to have this coverage. Finally, self-insured companies don't have money tied up in reserve accounts with an insurance company; when Sandmeyer Steel self-insured, it got about $100,000 back from its carrier.
No company should self-insure without buying stop-loss insurance, which puts a lid on what it will pay out in claims. A 100-employee company, for example, might buy stop-loss to pay individual claims over $25,000 or the year's aggregate claims above $300,000. To calculate the aggregate, insurers usually add 20% to the prior year's claim record to adjust for industry trends, then another 20% to 25% in margins.
With stop-loss, companies can limit the risks of self-insurance and budget at the start of each year for the maximum possible claims. Experts urge companies to establish their own reserve funds so that an unexpectedly high claim or a drop in cash flow doesn't leave employees waiting months to be reimbursed for their claims.
WHEN YOU WANT TO CONTAIN COSTS AND LET EMPLOYEES PICK THEIR BENEFITS: CAFETERIA PLANS
Employees of The Bank Mart will each tell the personnel department what benefits they want in 1990. Just as they did in 1989.
The mutual savings bank, in Bridgeport, Conn., started a cafeteria plan a few years ago for its 220 employees. Once an option only for large companies, cafeteria plans are now routinely available for companies with as few as 50 employees. In cafeteria plans -- also known as flexible benefits -- the employer's contribution usually comes in the form of a spending credit, which the employees use to "purchase" various options from a menu of benefits. One person might choose more health insurance and less life insurance; another, less health-care and more life and disability coverage.
For employees, this flexibility is attractive because they can tailor their benefits and levels of coverage to their own needs. For companies, it can mean savings on health-care costs. In a survey last year by Hewitt Associates, a benefits consultant in Lincolnshire, Ill., per capita medical costs for cafeteria plans rose 14.3% in 1987, compared with 20.4% for private plans nationally.
The Bank Mart's experience shows how flexible plans can achieve these savings. Under its plan, the number of employees who opted out of medical coverage (because they were covered by their spouses' plans) increased from 10 to more than 30. "Before, 20 people were taking it simply because it was given to them," says Carol Levey, manager of compensation and benefits.
Other employees chose lower-cost medical options, such as higher deductibles and copayments, and used the credits they saved on something else. This brought immediate reductions in the cost of health coverage. And the company will likely see more reductions in the future, since cost-sharing usually reduces overuse of medical services.
Even greater savings could come later because the company, if it chooses, can avoid the full burden of future increases in medical costs. The plan moves it away from the traditional defined benefits approach -- we'll provide certain benefits, no matter what the cost -- to a defined contribution approach. Each year, The Bank Mart will set its level of contribution to the entire benefits package, most of which goes to the medical plan; if the cost of medical coverage increases 20%, for instance, the company might raise its contribution by only 10%, leaving to employees the choice of either spending more of their own dollars or opting for a less expensive plan.
"We know that down the line, costs are increasing," says Levey. "I have a feeling that in 1990, we will be sharing more costs with employees."
Per Capita Medical Cost Increases:
Cafeteria vs. Other Plans
1985 1986 1987
Cafeteria plans 6.6% 8.2% 14.3%
All plans nationally 8.8 11.9 20.4
Source: Hewitt Associates, Lincolnshire, IL, 1989.
WHEN YOU'RE LOOKING FOR ALTERNATIVES TO YOUR INDEMNITY PLAN: HMOS AND PPOS
The news was bad for Tassani Communications: last April the company's insurer gave notice of a 50% increase for the plan year. Desperate to contain costs, the $25-million, 60-employee company scrapped its indemnity plan for a preferred provider organization, or PPO. The premium increase declined to 30%, still high but several thousand dollars less each month than the indemnity plan.
Tassani joins a growing number of companies offering managed care, which includes PPOs and health maintenance organizations, or HMOs. More than 60 million Americans are enrolled in managed care, most of them in plans offered by large companies. Fewer than a third of the small manufacturers in a National Association of Manufacturers survey offered HMOs or PPOs in 1989.
