Lowering your medical rates by 10 percent to 20 percent

By Allan Checkoway

Is it possible to lower your medical rates by double digit amounts? Absolutely! Without risk? Yes. Double-digit medical rate increases are expected to continue into 2009. Under the "rule of 72," in seven years it will cost more than $1,000 per month to insure a single employee under a traditional HMO program. CFO's ask, "Where's that money going to come from?"

Every year at renewal time, employers ask "when will it end?" "Today," is my answer, but first, let's consider some relevant data: A recent study identified that 36 percent of insured employees and dependents have minimal claims (limited to physician visits and prescription co-pays). Another 56 percent have additional claims ranging from $1 to $500 in a calendar year, while 14 percent have claims exceeding $500.

One medical insurer recently reported 80 percent of their claims in dollar amounts come from less than 10 percent of their insureds. Therefore, we can assume there's an 80 percent probability that most employers (and their employees) overpay for their medical coverage. Employers end up subsidizing 20 percent of their (unhealthy) employees by overpaying on 80 percent of their healthy employees.

HMO's tend to pool their rates for "cross sections" of employee groups and set average prices. Those "cross sections" are dependent upon age, family status, zip code, SIC code (industry grouping) and male/female ratios, all in incremental age groups. Unfortunately, such pricing doesn't allow for better than average claims/loss ratios on more favorable groups.

Within the same zip code area, let's say we have one company with well educated, high-earning professionals, most of which utilize their health club memberships. Their cafeteria only offers healthy, low-calorie lunches. Another group around the corner pays similar premium rates although there are numerous smokers among the workforce, some overweight and several heavy weekend drinkers. They have similar premium rates, as insurers have to spread premium equally amongst all groups, with no method to recover any extra premium being paid by healthier groups.
A brief historical perspective

Over the last decade, we have experienced substantial increases in the cost of health care, translating to double digit medical insurance rate increases. Why exactly has this occurred and, more importantly, is there anything we can do about it?

The high concentration of U.S. health care expenditures

Actual spending is distributed unevenly across individuals, different segments of the population, specific diseases and payers. Analysis of health care spending shows that:

Five percent of the population accounts for almost half (49 percent) of total health care expenses. The 15 most expensive health conditions account for 44 percent of total health care expenses. Patients with multiple chronic conditions cost up to seven times as much as patients with only one chronic condition.

Health care expenses in the United States rose from $1,106 per person in 1980 ($255 billion overall) to $6,280 per person in 2004 ($1.9 trillion overall).

The diabetes and obesity epidemics

Diabetes affects tens of millions of people in the United States and costs about $174 billion each year in medical expenditures -- more than any other health condition. Even worse, diabetes is the sixth leading cause of death in the United States. Increasing evidence is showing that obesity and type-2 diabetes are inextricably linked, and rising obesity rates are fueling the growing type 2 diabetes epidemic.

We know that excess weight exacerbates health problems like high blood pressure and abnormal cholesterol levels in diabetes patients, which often leads to heart disease and kidney failure, among other problems. Meanwhile, weight loss, even a modest amount, has been found to help people with diabetes achieve and sustain blood glucose control and live healthier, longer and more active lives.

Among U.S. adults aged 18-79 years, the incidence of diagnosed diabetes increased 41 percent from 1997 to 2003. According to Medical News TODAY, "Obesity is a major factor in this recent increase of newly diagnosed diabetes."

According to a New York Times article dated June 23, 2008: "Weight loss, even a modest amount; has been found to help people with diabetes achieve and sustain blood glucose control and live healthier, longer and more active lives. Percentage of adults classified as obese doubled from 1980 to 2000 to 31 percent of the population. Employers pay heavily for obesity's spread. Obesity accounted for 27 percent of the rise in medical costs from 1987 to 2001."

Different groups within a group

To continue, employers generally have purchased coverage for their employees based on perceived needs of an entire group, without regard for employee "segments." For example, in one 40 person group, we identified there were 14 that were in their 20s, with 12 in their 40s and the other 14 were in their 50s. A 25-year-old male rarely goes to his doctor, whereas, a 45-year-old married couple with two children in the emergency room every other month need more comprehensive coverage. The point being, we can have two or three groups within the same group from a needs perspective. The question we ask is: How do we satisfy the needs of each group at the same time?

Double-digit rate increases

Up to this point in time, how have employers generally been dealing with double digit rate increases? The norm has been to utilize higher co-pay plans to diminish the impact of say, a 12 percent renewal increase. If there's currently no hospital co-pay, the employer utilizes a $250 in-hospital co-pay to reduce the 12 percent to 4 percent. If there's already a $250 hospital co-pay, then the next move might have been to increase the hospital co-pay from $250 to $500.

When does it end? The problem with this approach is that eventually we end up with no place to go. Sooner or later we need to dig in our heels and create a business plan to better manage our health care dollars.

Employers are now becoming more proactive in controlling skyrocketing medical insurance rates with formalized wellness programs. The Dupont Corporation recently discovered that "excess" illness (employees not taking care of themselves) was costing them $2,463 per healthy employee.

The new generation of self-funding

Given that 71 percent of employers with 2500+ employees are already self funding, are there any self funding options for smaller companies? Yes, dependent on several factors. You need to ask, are you dissatisfied with double digit rate increases, suspecting your employees are not heavy utilizers of medical care? Are you willing to accept some risk in exchange for the potential of saving premium dollars? Are your employees generally healthy and not an "older" group? Is your company profitable, or on the road to profitability, possibly in a growth mode? These are just some of the questions that you'll need to answer before taking on the risks (and potential rewards) of self funding.

You may well be an excellent prospect for self funding, especially the "new generation" self funding that is tied directly to a wellness program. More than 81 percent of U.S. businesses with 50+ employees already utilize some form of wellness program. The most common types focus on exercise and health club memberships, weight management/nutrition, smoking cessation, and stress and disease management. Many of these wellness programs are promoted by the insurers themselves, yet we need to look beyond traditional wellness programs towards the "new generation" of wellness programs tied directly to a self funding program.

There's no one-size-fits-all approach to this. Many of our readers are not in a position to risk self funding due to the size of their business or the inherent financial risks themselves. At this point in time, is there any way the smaller employer can create a business plan to better manage their health care costs today and in future years? Yes.

High deductible health plans

Seek out an insurer who offers a high deductible ($1,000 and more) medical plan. We can replicate the risk-sharing of self funding with this "new breed" of high deductible medical plans. At the same time, we can fund the deductible via a personal spending account with a third party administrator (TPA). The deductible ($1,000, $2,000 up to $5,000) is administered by a TPA that reimburses each employee for their deductible amounts partly or in full.


I'd like to add a cautionary note relative to the "new breed" of high deductible medical plans packaged with a personal spending account. As much confidence as you might have in your insurer, you're placing your trust in a TPA, as they'll be interfacing with your employees. Since the new breed program is a departure from your employees comfort zone, make sure you're dealing with a highly regarded third party administrator.

The bottom line: Comparing the cost of a high deductible program with a traditional $250 hospital co-pay plan can save upwards of 15 percent to 30 percent in premium contribution. That savings is more than adequate to fund the "shortfall" created by the deductible. The key to the new generation concept is that the deductible is funded with the employer's savings through the personal spending account, and therefore makes high deductible plans beneficial for employers and their employees.

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