Business As Un]Usual

Business as UnusualCan your company attack insurance costs as stubbornly as it does every other budget item and still provide good, competitive benefits? The answer is yes

Popular wisdom has it that there's little a growing company can do to control its health-insurance costs. After all, premiums have been rising by 25% or more each year for more than a decade -- a statistic that understates the increases many small companies have seen. Behind the rising rates are a number of factors beyond any chief executive's control: the aging of the U.S. population, government shifting of health costs to the private sector, high-tech medical procedures, AIDS, and so on.

Adding insult to injury, many insurance carriers refuse to cover small companies. They say the employee bases are too small for them to be able to spread their risks even if they charge exorbitant fees. So you have growing companies trying to attract and keep good employees at the same time they're less able to offer one of the most valued fringe benefits.

That was the quandary Hospital Billing & Collection Service Ltd. (HBCS), based in New Castle, Del., faced when it started up, six years ago. At the outset, the seven-person company was rejected for group insurance coverage -- because of its size -- "by everyone except a pooled fund sponsored by the Delaware Chamber of Commerce, which had ridiculously high rates," says human-resources and administration director Deanna Troy. Such rejections are typical for start-ups and small-business ventures, but they rankled HBCS's managers. "We were in the business of solving hospitals' financial problems," says Troy. "How could we tolerate it if our own health-care costs seemed out of control?"

In most companies human-resources personnel are hired later on in the growth cycle, but Troy was HBCS's seventh employee. Her mandate was to figure out how to provide comprehensive insurance and other benefits while containing costs. "We envisioned growing the company quite quickly to 150 to 200 people as we signed up more and more hospitals for our financial-support services," she explains. "Since we were based in a state that at the time had low unemployment and strong employer competition from Du Pont and the big banks, we knew we'd have to offer competitive benefits packages."

That's when Steve Schloss, a benefits specialist with Johnson & Higgins, in Wilmington, Del., got involved. "Deanna Troy wanted to set up the kind of insurance package that normally is available only to big companies," recalls Schloss, who acted as a broker for HBCS. "And she wanted it at competitive rates. That meant I had to go out there and sell insurers on the company as an account they'd want to have over the long term."

Schloss put together a growth picture illustrating the company HBCS intended to become. He included its business plan and projections; newspaper clippings and hospital marketing material; and the company's 20-year lease on office space. He even offered a tour of its still largely empty offices.

"It's kind of hilarious in retrospect," Troy recalls. "Steve and I would take prospective insurers around our 30,000-square-foot offices, and I would tell them, 'Once we expand, we're going to hire someone to do this job and put that person here, and then we're going to set up partitions and put other people there.' And Steve would tell them why he believed us." In effect, Schloss was giving HBCS credibility in the marketplace. The process worked.

Today HBCS, with about 125 employees, is impressively successful at controlling health costs. "If we had stayed with our original insurance carrier, our insurance costs would have risen by 270% over five years. Instead, our costs have risen by just over 18% on individual policies and 37% on family policies over the same period," she says.

HBCS's overall goal, Troy explains, is to be able to "budget for our insurance costs the same way we budget for every other operational expense -- in response to our own internal financial trends and goals, not the external trends in a health-care industry where costs have gone crazy."

On the first workday after New Year's Day, Troy sends out her first insurance communication of the year. "The way our plan is set up," she explains, "employees have a lot of decisions to make by the end of January." HBCS offers a cafeteria-style benefits package to employees, who choose among life insurance, long-and short-term disability, dental, health, and whatever other coverage Troy has negotiated with the insurance company for that particular year. Each year the company assigns to employees an allowance that covers HBCS's basic individual and family packages.

Thanks to a flexible spending account, employees who feel they need extra levels of protection can pay for them with pretax salary dollars. Collections supervisor Pamela Smollen, for example, pays more each month so that her husband and three children can be covered under a family HMO option. "But I really can't complain," she says, "because we could buy the same coverage under his company's plan for three times as much as we pay HBCS. And his company has more employees than we do."

"Day one of the new year," Troy says, "we remind people that we'll be scheduling employee meetings to make sure they understand their choices." Smollen, for one, sits down with her husband to "analyze every single medical expense for our family over the past year, the same way HBCS's executives do when they work out the company budget."

Since year-to-year change is the norm at HBCS, during January Troy spends as much time as necessary on education. By then, she already has spent half a year figuring out how to achieve the company's insurance goals. She also knows the kind of medical and other health-care benefits that matter most to HBCS's employees.

To see how the overall strategy works, consider HBCS's most recent year:

July-August
Although 1990's insurance policies still had a half year to run, Troy, with the help of Schloss, began focusing on 1991's prospects. Their goal was to build a database that would help them respond to renewal price quotes later in the fall.

For Troy, there were two kinds of internal information to analyze. The first was current numbers for employees: their average length of employment, marital status, number of eligible dependents, and their patterns of insurance usage. Most of the information came from Troy's own files, supplemented by detailed computer printouts from her insurance carrier about the type, frequency, and size of health-care claims. (Quarterly claims-loss records should be required reading in all companies, in part so managers can make educated decisions about the kinds of coverage that do and don't matter to employees. Several years ago, for example, Troy discovered that employees had never filed claims high enough to take advantage of the company's $500 cap on supplemental accident insurance, so she instituted a cost-saving $300 cap.)

The second kind of internal information was projections for the next year: revenue growth, profit margins, staff expansion, and other departments' operational expenses. To come up with those numbers, Troy met with her CEO and other department heads who were setting their own budgets in August. That is a departure from typical behavior at other companies, where finance or human-resources employees and their insurance brokers do the insurance planning and purchasing in a vacuum.