Heads Up

As health-insurance expenses rise, try these cost-containment strategies

For Peter Hermann, health insurance is a headache. "Health insurance is a remarkably large expense, even for a 12-person firm like ours," says Hermann, a general partner of Heritage Partners Inc., a private-equity investment firm based in Boston. "You can't hire and retain good people without a good benefits package. But as managers, we need to spend an inordinate amount of time thinking about health insurance--not only because the costs keep rising but because the marketplace is so volatile. There's a forced need to keep reevaluating your company's coverage as insurers pull out of certain types of products or make other major changes."

After a few years of relative calm, when most employers were able to keep their coverage costs reasonably stable by such moves as switching to "managed care" options like health-maintenance organizations, growing numbers of business owners are ready to head for the emergency room. Here's why: In a survey of employers large and small conducted by health-care consulting company William M. Mercer, two-thirds of the respondents said they expected health-insurance costs to increase this year. What's more, those employers who expect an increase project that it will average 7%.

Small businesses may be particularly hard hit by this round of price hikes. In a Dun & Bradstreet study released earlier this year, 50% of small companies surveyed said that their health-insurance premiums were increasing--by an average of 13%. Moreover, National Small Business United, a small-business advocacy group based in Washington, D.C., in May asked its members to respond to an on-line question about health-care costs. The result? More than 70% of those answering the (admittedly unscientific) survey said they were seeing health-insurance costs rise. What's more, almost half the respondents said their premiums were increasing by 15% or more.

One reason the latest round of rate hikes is so upsetting for business owners: many believed that switching to managed care was a way to permanently remove the risk of premium increases that would outstrip the rate of inflation. But the cost of new medical technologies, combined with higher costs at HMOs themselves, may be setting insurance fees back on the fast-growth path of the late 1980s.

That's why companies once again need to look more aggressively for ways to save. Obviously, you can shop for a new plan or increase employees' contributions. But what if you've already tried those options? While we can't offer a miracle cure, here are some additional strategies to consider:

  • Make sure your plan fits your company's needs. No matter how cost-conscious you are, there's no sense letting the volatile insurance marketplace drive you in a direction that doesn't make personal, as well as corporate, sense. "Before even thinking about the price, we made sure that we knew exactly what kind of coverage made the best sense for our own family, as well as for our key employees," says Jane Rafal, vice-president and co-owner of OLI Systems, a 19-employee environmental-software company based in Morris Plains, N.J. That's a sensible approach--especially during a tight labor market like this one, when mediocre medical benefits might make your company less attractive to older employees or those with families. "We recently hired a top-notch programmer, and I was really amazed by how much the quality of our medical benefits mattered during negotiations," Rafal observes.
  • Isolate the nuisance costs. "Areas like prescription-drug coverage can nickel-and-dime you to death unless you set up a system that encourages employees to think twice before they make every single purchase," says Paul Gregory, a health-care consultant based in New York City. So-called "behavior-health" coverage (such as psychiatric care and substance-abuse treatment) is another area that can jack up the cost of your company's coverage if you're not careful. One solution: if possible, remove those niches from your basic health-care plan when it's time to comparison shop among insurers. Then contract for each with managed-care specialists that can fine-tune your coverage so that it remains a meaningful--but controlled--benefit for employees. "It's amazing the way a well-planned copayment charge will discourage employees from using the company plan for every prescription drug they've ever heard of that might or might not turn out to be necessary," Gregory explains.
  • If you're making cutbacks, introduce plan improvements at the same time. "Most employees recognize that health-care coverage is expensive, so they're willing to make some trade-offs, especially in a situation where they feel they're also getting a real benefit or an improvement in their plan," notes Vincent Gandolfo, a senior managing director at Frank Crystal & Co., a New York City-based insurance broker and consultant serving middle-market companies.

It's also important to make sure that your cuts yield meaningful savings. For example, many businesses now have plans that offer employees some sort of choice between managed-care and traditional indemnity coverage. Gandolfo often finds that business owners with that type of plan unsuccessfully try to lower costs by increasing the deductibles or copayments on the indemnity option. "I hear it all the time from clients," he notes. "They say, 'How can it be that I won't knock 10% off my costs if I'm willing to sign up for a $1,000 deductible on the indemnity coverage?' But it doesn't work that way, because insurance companies realize that most employees will sign up for the managed-care option--which means that's the place where you've got to make meaningful cuts." His recommendation for real bottom-line savings? Raise your managed-care copayment charge on "in network" office visits to $10 or $15, rather than the typical $5.

  • Start aggressively monitoring all aspects of your plan. "There's no doubt that those companies that have 'best practices' when it comes to their health-care coverage rely on two key behaviors," notes Dave Borden, the Dallas-based national director of health and welfare benefits consulting for the professional-services firm Arthur Andersen. "First, they actually have a health-care-management strategy and they take proactive steps to make certain that they achieve their goal, rather than just responding to changes in the marketplace. Second, they actively evaluate all aspects of their health-care coverage and make incremental changes as necessary."

Cost control is obviously one important aspect of plan monitoring, but other issues matter as well, such as the quality of the plan and the popularity of various features. It's much easier to negotiate on cost-control issues when you know which coverage features actually matter to your employees and which benefits are not meaningful.

  • Look beyond short-term price swings. No matter how aggressively you want to control costs, it's not realistic to think that your company can switch insurance carriers every year or so. Just cleaning up the paperwork trail from holdover claims could overwhelm you. But you'll benefit by setting up a health-care strategy that takes into account coverage and cost-control goals over two to three years. Stay in touch with your insurance broker or consultant throughout the year to make certain your plan is keeping you basically on track. Be prepared to make annual adjustments to respond to changes within the marketplace or in your employee base. And, of course, comparison shop among insurers every few years to find out whether a big switch makes sense.

Employers predicting increases ahead

Here's what companies anticipated for this year's health-care costs:

67% Expected health-care costs to increase,

by an average of 7%

23% Expected costs to stay the same

10% Predicted some type of cost decrease

Source: Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans, 1997.

HMOs have a big selling point: coverage is just plain cheaper than it is for any other type of corporate health-insurance plan. (According to a Mercer/Foster Higgins survey, the average cost for an active employee on an HMO plan is $3,165, compared with $3,521 for traditional indemnity coverage.)

So if you decide to sign up for an HMO, the big question becomes, How can you capture those cost savings without sacrificing quality and service? Look no further than Choosing and Using an HMO (Bloomberg Press, 800-233-4830, 1998, $19.95), by health-care journalist Ellyn Spragins. This 255-page guide is chock-full of useful advice, including "11 indicators of excellence" to help business shoppers find their way through a confusing marketplace.