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:

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.

While Troy did her research, Schloss came up with projections that showed what 1991's pricing structure would look like. Since insurer rates typically vary widely by size and type of company, region, and other factors, Schloss did a range of projections, fine-tuned to growing companies operating within the Delaware-Maryland-New Jersey market.

"It didn't look good," he admits. "There were just no signs of any price abatements. Health-care costs were continuing to go up, and government cost-shifting was only intensifying the trend. That meant companies could typically expect to see another round of double-digit health-care inflation." That prospect was troublesome to Troy, who needed to keep the overall increase for health-care coverage to HBCS's growing employee base at around 18%.

Although it was still too early in the year for renewal bids, Schloss contacted the company's carrier to get a sense of its thinking on price hikes. The previous year, when projections had appeared too high, Troy had shopped around for the first time and switched carriers.

For 1991 Schloss expected renewal rates for the same coverage to run at least as high as the industry trend. That would kill Troy's budget and push her department's costs out of line with the rest of HBCS's operations. So the financial negotiations began.

First, Troy and Schloss examined the company's claims and loss records closely, so they could demonstrate to their insurer that HBCS's policy costs didn't warrant such a high increase. In the past they had used this method to help keep renewal rates under control. This time Schloss was worried, based on his sense that HBCS's insurer had recently stopped pricing aggressively because it was no longer interested in building -- or even holding on to -- market share in the group-health end of the business.

More time-consuming was their examination of the company's options. "Whether shopping or staying with the same carrier, I had the same basic decisions to make," Troy says. "If the price came in too high, I had to accept it, change the policies to lower the cost of coverage, pass more of the cost on to our employees, or come up with some combination of my choices."

Schloss and Troy worked over the pros and cons long before they addressed the issue of remaining with HBCS's existing carrier. Among their strategic decisions: HBCS would stay within Troy's budget, whether that meant making minor changes in plan design or looking for a new carrier.

Here's when insurance became Troy's major preoccupation -- during the other months of the year, she had spent about a third of her time on insurance matters. Schloss came to her with some bad news: HBCS's insurance carrier had decided to pull out of the group-health-insurance market entirely, so the company had no choice but to start shopping around. Fortunately, with close to 120 employees, its risk pool was large enough to attract competing bids.

By mid-December, HBCS's insurance negotiations were nearly completed. Schloss had a bid from an insurance carrier that offered almost the same package at rates just a few dollars higher than those for 1990. "The only significant things our employees were going to lose were the opportunity to pay cash out of their own pockets to get a $100 deductible instead of the standard $200 deductible, and a $500-deductible option," explains Troy, "and they were going to lose those only because the carrier didn't offer them. It seemed like a great deal, and it was going to keep our overall cost increase way below the industry norm."

Schloss's focus as always was on controlling costs. So even though the new carrier was quoting a good price, the broker proposed ways HBCS could cut even more from its 1991 insurance fees. "This year," he says, "we talked about removing orthodontics coverage from the dental plan, eliminating the prescription-drug card, and even raising the cap on out-of-pocket expenses from two to three times the deductible." Eliminating or reducing any of those benefits would have lowered HBCS's premiums.

But Troy's role here was to weigh potential cost savings against other factors, including the popularity of the benefits and what their removal would do to employee relations. "Since we were already able to stay within our desired budget, we could afford to pass up the savings opportunities," she concluded.

With 1991's insurance package in place, Troy began to concentrate on employee education. "We want our employees to understand that we're paying a lot of money for insurance, and we're designing the best kind of plan we can afford in the current economic environment. We tell them that if they don't use or need the benefits we're buying, then we're just wasting our money, which hurts the whole company and our growth prospects."

Employee education began with that first memorandum after New Year's Day, which spelled out the major details of the coverage and invited employees to question-and-answer sessions, which Troy limited to about 40 people per session.

By the end of January employees had submitted insurance forms describing the type of coverage they had chosen for plan year 1991 and the contributions they wanted to make for additional coverage.

As the new insurance year got under way, employees were being educated constantly, if informally, about the 1991 insurance package. "We wrote about the new plan in our company newsletter," Troy says, "and sent out memos as necessary or to clarify procedures whenever we started getting too many questions from employees about a particular part of the process." In the past her memos have covered developments in the world of health care or insurance, such as changes in the state law that governs which parent's insurer provides primary coverage for dependents. This year, because of the company's switch in insurance carriers, Troy focused on helping employees with the new paperwork and filing requirements.

In the past, these months have required the least effort from Troy. Although she would continue to collect information about insurance trends, she would do so in a low-key way, since it would be too early to anticipate the next year's cost developments. And by that time, employees usually were used to the new year's plan, which meant that Troy could spend less time on education. But this year was different.

In May Troy circulated amendments to the company's insurance manual containing 1991 coverage descriptions. The manual is a testament to how completely the company believes its insurance-management success rests upon employee education. "If people felt insecure about their insurance coverage, didn't understand it, or didn't believe that we were being above board about our motivations in keeping the plan flexible, we'd suffer from higher employee turnover," she says.

The insurance manual, which is distributed to every new employee and updated every April or May, is easy to read. As last amended, it has sections on medical, dental, life and accidental death, long-and short-term disability, and reimbursement (flexible spending) accounts. The sections are refreshing in their approach. Each begins with definitions of the relevant jargon, such as "covered charges," "coinsurance," and "evidence of insurability." Options are listed, described, and compared with one another in some detail. Services that are not covered, such as periodontic treatment and cosmetic surgery, are spelled out as well.

"The more we can educate our employees, the more they'll understand that they're responsible, too, for getting the kind of coverage they need," says Troy. "Once they see that, they'll also recognize that it's in all of our interests to manage and control the company's health-care costs." One sign of success: Troy conducts exit interviews, and to her knowledge HBCS has never lost an employee because of dissatisfaction over health-care or other benefits.

Troy also distributed a six-page total compensation booklet, personalized for each employee. Along with other information, it included a statement of the individual's insurance choices and a dollar figure for the cost of insurance benefits and salary.

Collections supervisor Smollen says when she receives her personal-compensation statement and sees how much insurance costs, it helps her understand the financial pressures the company faces at renewal time. "To be honest," she says, "I think companies should circulate that information to their employees every month to keep reminding them of that fact."

This year, unlike earlier years, Troy and Schloss began the search for innovations for 1992 during May and June rather than July and August. Gilbert A. Valdez, HBCS's new CEO, himself a former insurance-industry executive, is keeping Troy on her toes. "I refuse to believe that insurance costs are any more impossible to control than any other operational costs," he says. Then he smiles. "My attitude may make Deanna's job harder than those of many of my other departmental managers. But she's done a great job of controlling these costs so far."

Troy has no illusions that insurance management is going to get any easier in the current economic climate. "So far, we've been able to avoid making any unpleasant cuts in coverage, in part because we've been growing so quickly. But when revenue growth slows down -- or industry prices rise too high -- I'll have to begin making some harder trade-offs."

She pauses, but speaks again with confidence. "If we can just keep educating our employees about what we're doing and why, I believe we'll be able to keep them on our side about controlling insurance costs."


What you need to know to negotiate better rates with your health insurer

* Know your company's claims-loss records. These are statements available from insurance carriers detailing every claim filed by employees by type, cost, and so on. Look for ways to argue that covering your company hasn't been costly enough to warrant big price hikes.

* Start negotiating early. Begin at least six weeks before annual price quotes are due, so that you won't be boxed into accepting an unnecessarily high rate or risk losing valuable protection.

* Shop around, but not too frequently. If an insurance carrier believes your business is good only for a year or so -- and that then you'll start soliciting bids from the competition -- it probably won't bother to court your company with a low bid.

* Don't buy too much insurance. Again, claims-loss records will tell you if you're paying for higher coverage than your employees typically use.

* Stay flexible. That will let you take advantage of price discounts your insurer may offer when it wants to increase market share for a particular type of policy.

* Be aggressive. Use any service failures, glitches, or other problems you encountered with your insurer during the past year as justification for keeping rates lower. Keep careful records, including dates and full descriptions of problems.

* Focus on major, not minor, savings. You'll bog down negotiations if you focus on policy changes so small that savings won't be worth the resulting paperwork and administrative hassles.

* Hire an independent insurance consultant every five years or so. He or she can do what's known as a conceptual analysis of every aspect of your insurance coverage. Expect to learn about missed opportunities, excessive costs, or problems with your broker.


Hospital Billing & Collection Service (HBCS) has kept an eagle eye on its health-insurance costs since the company opened its doors, six years ago. As a result individual health-insuarance costs have risen only 18% over the past five years; the increase for family policies has been 37%.

Individual rates Family rates

(monthly) (monthly)

1987: 27 employees* $114 $283

1988: 64 employees* $74 $204

1989: 90 employees* $108 $298

1990: 122 employees* $134 $370

1991: 123 employees* $135 $387

* at year-end

1987: Standard plan, no preventive-care benefits, sold by high-risk employers' pool. If HBCS had stayed with plan, costs would have risen 270% by 1991.

1988: Switched to regular carrier. Package included $200 medical deductible; dental, disability, and preventive health-care insurance; and life insurance equal to one year's salary. Employees could pay more for enhancements.

1989: Raised deductible on prescription-drug card from $1 to $3 on generic and $3 to $5 on brand names; lowered cap on accident coverage from $500 to $300 (Higher cap not used by employees). Added HMO option. Broker suggested raising out-of-pocket limits on all health costs; HBCS decided too costly in employee relations.

1990 Switched HMO companies to control costs. Broker suggested raising deductibles, eliminating prescription-drug card; company decided against changes.

1991: Switched carriers because insurer left group-health business. New plan identical except insurer didn't offer cosmetic surgery or option to pay more for $100 deductible. Broker suggested eliminating orthodontics, raising out-of-pocket caps, eliminating prescription-drug card; company decided against reducing coverage.