But they soon will. Insurers that once ignored the small end of the market now are competing to sign up companies with as few as two employees. The reason for small companies to heed the new pitch is compelling -- managed-care plans usually save money. In addition, enrollment in a managed-care plan enables small companies to avoid much of the cost shifting now going on in the market (see Negotiate the Best Deal, page 6).
The traditional medical plan, now slowly fading away, is an indemnity program in which providers are reimbursed on a fee-for-service or a cost-plus basis. Employees are free to choose their own physicians and hospitals. That the cost of these programs has soared should come as no surprise: there are no restraints on use of medical services or on fees charged by providers.
Managed care is supplanting the traditional plan because it is designed to contain costs. Here is a brief guide:
HMOs
How They Work: HMOs receive a set annual fee for each enrollee, which gives them an incentive to deliver cost-effective care. Employee payments are limited to about $5 for each visit to a doctor's office. Each patient has a primary physician who controls access to medical services.
Your Savings: This varies widely. Some companies report no savings at all, but generally you can expect a 10% savings over the cost of a traditional indemnity plan. Some companies may save as much as 40% if local HMOs are competing vigorously for market share. Premium increases may also be lower. For example, Cigna Corp. reports that its HMO premiums increased an average of 9% a year between 1983 and 1988, compared with 18% for indemnity plans.
What to Look Out For: Check the HMO's reputation for delivering quality care. Also, check its history of premium increases. Beware, too, of offering a choice of an HMO or an indemnity plan. Younger, healthier employees tend to select the HMO, while older, less healthy people become concentrated in the indemnity plan. Indemnity premiums go up as a result -- often negating any advantage of the lower HMO rates. The solution is to contract with an insurer that offers both an indemnity plan and an HMO and will base rates on the history of all your employees together.
PPOs
How They Work: A network of physicians and hospitals agrees to a fee schedule that usually represents a 10% to 20% discount on their usual charges. The physicians may also agree to a set of procedures designed to keep costs down. Employees can use non-PPO providers, but companies provide incentives -- lower deductibles and copayments -- to encourage them to stay within the PPO network.
Your Savings: You can expect to pay 5% to 10% less than the cost of an indemnity program. If you offer very low deductibles and copayments or waive them entirely -- which many companies do when they introduce the program -- you may realize no savings at all.
What to Look Out For: Does the PPO have a reputation for quality care? Does it have broad coverage geographically and by specialty? Check the PPO's history of premium increases, since they usually can't control the use of physician services very well, especially when deductibles and copayments are low. "Utilization can go up like crazy," says Larry Tucker, a partner and benefits consultant with Hewitt Associates. The remedy: raise deductibles and copayments, while still maintaining a financial incentive for employees to use the network.
Manufacturing Companies Offering HMOs/PPOs
Number of employees
20,000+ 85%
5,001-20,000 82
1,001-5,000 63
301-1,000 44
101-300 35
51-100 27
25-50 28
Fewer than 25 22
Source: National Association of Manufacturers Health Care Survey conducted by A. Foster Higgins & Co., New York City, 1989
Growth in Number of Participants* (in Millions) Enrolled in HMOs, 1978-88
1978' '79 '80 '81 '82 '83 '84 '85 '86 '87 '88
8.5 9.5 10 10.5 11 14 15 19 24 29 31
* Excluding dependents.
Source: From a survey of HMO plans conducted by InterStudy, Excelsior, Minn.
Check Your Dependent-Care Policy
If many of your employees have working spouses, you may want to think through your company's dependent-care policy. When dependent coverage is essentially free, employees may be taking it even though their spouses are covered where they work. So the extra $2,000 or so that your company spends in those cases is wasted. In other instances, the employer of the spouse may be charging for dependent coverage -- so if you are providing it free or at a nominal charge, the dependent coverage will end up on your account. The trick is to come up with an amount to curb these problems that is still reasonable for sole breadwinners.
WHEN YOU THINK HOSPITAL BILLS ARE TOO HIGH: UTILIZATION REVIEW
Mark Kaplan is holding two versions of a hospital bill in his hands. Nothing unusual in the first one: tubal ligation, a stay of two days. The hospital wants $3,580.05.
Most companies would pay the bill. Kaplan, director of human resources at Mandel-Kahn Industries Inc., sent it out for an audit instead. The second bill, postaudit, he did pay: $2,696.91. After the cost of the audit, the company saved 16%.
This is routine for Mandel-Kahn, a Houston-based distributor with 800 employees. Every audited hospital bill comes back with savings of at least 15%, and the hospitals don't dispute the new figures. Most of the savings come from reduction of charges that are above the usual and customary, but others are for services that were never performed. "I've had male patients charged for vaginal examinations," says Kaplan. "We've been charged for hospital stays when there wasn't any stay at all."
Auditing the work of health-care providers is part of a broad strategy known as utilization management, which attempts to limit costs by overseeing the length and necessity of hospital stays and many outpatient procedures. The services are provided by many insurance companies and by an array of vendors whose largest player, Intracorp, of Berwyn, Pa., covers 25,000 employers and 11.5 million people. A study published last year by The New England Journal of Medicine found that one insurer's program had slashed medical bills by 8.3% for 222 patient groups. And Mandel-Kahn hasn't had a rise in medical costs since 1985.
