Making Insurance Cost Shifting Less Painful
With no end in sight to health-care-cost inflation, many companies have concluded there's no way to avoid some type of cost shifting -- usually to employees, who must pay higher deductibles and a larger percentage of nonreimbursed expenses. (See "Cost-Containment Strategies," at right.) And that can wreak havoc on employee morale.
Knox Semiconductor, a Rockport, Maine, manufacturer with 40 employees, opted for a more constructive approach: at the same time the company introduced insurance-cost-control measures, it began providing each employee life insurance, a mutual-fund savings account, and short-term and long-term disability coverage. And because of the unusual way the company financed those benefits, it wound up ahead in overall cost savings.
When John Morey, president of Knox Semiconductor, sat down to look at his insurance coverage in 1989, it was costing him $80,000 a year. "The same exact coverage for the same number of people was projected to cost $170,000 by 1991," he says. So with his insurance broker, he came up with cost-saving measures, which included partially self-insuring medical benefits, and a higher deductible for employees. Savings kicked in immediately. In 1990 the price of coverage stabilized at $80,000, and in 1991 it was $110,000.
To simultaneously finance the new benefits, Knox started contributing $6 per employee weekly into a mutual fund that's administered by the same insurance company that handles the rest of its coverage. Employees must contribute $6 as well, which is deducted from after-tax weekly salaries. "Of that $12, we use $5 to buy each employee a whole-life insurance policy," says Morey. The longer an employee works for Knox, the larger that death benefit will grow. Employees that leave the company take the policy with them.
The rest of the joint weekly contribution stays in the employee's mutual fund until he removes it to pay off his deductibles, nonreimbursed medical charges, or any other personal expenses. If employees decide to empty their accounts, they'll have to dig into their pocketbooks to pay off any medical bills the company doesn't cover.
"We spend a lot of time now making sure people understand the benefits of all the coverage we provide, including the paycheck protection that comes from disability coverage," Morey says. There are other benefits as well: the company has saved so much money through the new system, mainly thanks to its switch to partial self-insurance, that it can still afford to reimburse 80% of most workers' medical expenses.
-- Jill Andresky Fraser
A survey by the Society for Human Resource Management found that small and midsize businesses are trying a vast range of approaches to control their health-insurance costs. (For the percentage of companies trying each approach, see columns A.) Unfortunately, many of those approaches haven't yet proved very effective, as seen in the relatively low effectiveness ratings that employers who use each strategy provided. (For percentage trying the strategy who found it worked, see columns B.)
Employ fewer than 100Employ 100 to 500Cost-control measureABABPrecertification of admissions45%40%62%30%Requiring second opinion44225816Improving employee awareness35134815Higher deductible23192832Special pretax spending accounts17672740Reducing benefits15191827Utilization reviews13133234Employee-assistance programs12 52519Improving data analysis12 01819Instituting HMO12532329Wellness/fitness programs11 02322Preemployment medical exams11502333Instituting PPO 9381632Choices/cafeteria-style plan 9771346Requiring outpatient care 8151635In-house medical service 3 0 329 Source: "Health Care Cost Containment Survey," Society for Human Resource Management, Alexandria, Va., 1990.