Can Companies Influence the Cost of their Health Insurance?

If you feel your company has adequately managed its health insurance costs, you don't need to read any further. I suspect most of you are at least a little curious as to how you may influence the cost of your health insurance, especially if you are a small to midsize company without costly expert resources at your disposal. The next question is of course, "By how much?" While your insurance company will ultimately determine the premium rates for your group employer health insurance plans, the "employer" or "company" can significantly impact current and future rates.

To start, it is helpful to understand how insurance companies make money:

• Profit Margin -- the excess of premium collected over incurred and paid claims.
  
• Expense Charges (Margin) -- the costs of processing and paying claims, benefits, management services, network access, executing coordination of benefits provisions, large claims pooling charges, premium tax, etc.
  
• Interest or Investment Gain on assets.

Since employers have limited control over expense charges and little or no control over investment gains, we will focus on the profit margin, or loss ratio. Insurance companies must manage their profit margin in order to retain adequate capital reserves and remain financially stable. When loss ratios are well managed, insurance companies are likely to make adequate returns on their investments and expense charges. Employers will also win because they will not incur significant premium increases to cover claim losses.

Employers should try to minimize the "claims or losses" versus the amount of premium collected. If employers can help manage or drive down loss ratios, insurance carriers have less leverage to raise premiums. This reduces the compounding effect of yearly rate increases.

Some of the most significant factors employers may use to influence their loss ratio are listed below:

Consumer-Driven Health Plans -- These plans have higher deductible and co-pay features which mean the consumer or employee pays more out-of-pocket expenses before the insurance company starts to pay claims. The result is that such plans have lower premium rates than more traditional policies. Rising insurance premiums have forced many companies to adopt these types of plans, if they want to continue to provide health insurance.

Health Savings Accounts (HSA's) -- These accounts may be used by employees to pay out-of-pocket costs associated with the high-deductible health plans. The dollars used to fund HSA accounts are deposited on a pre-tax or post-tax basis, so the employee is saving an amount equal to what he/she would have been taxed--which may be significant.

Dual Plan offerings -- These plans provide two or more plan options that include "high" and "low" offerings. The higher cost option provides richer benefits while the lower cost plan has more moderate benefits. The objective is to increase employee participation by offering a plan that entices healthy employees to "buy-in" to the healthcare plan. This will generally improve the loss ratio by adding premium from employees that have minimal claims due to good health. These healthy employees are also protected from catastrophic illness and the potentially devastating financial consequences.

Identify over-utilized benefits in your plan -- Employers often make the mistake of changing benefits that don't impact the area of its plan where claim utilization is most problematic. For example, identifying through your health insurance partner that your prescription drug benefit accounted for 30 percent of your claim costs should be a sign that a benefit change is necessary. Lowering the Rx benefit by sharing more of the prescription drug cost with employees and their dependents will reduce the burden put on insurance companies resulting in significant savings and an improvement in your loss ratio.

Network hospital and physician discount analysis -- Insurance carriers may contract with hospitals and physicians to provide services for their insured employers. The cost of services or "claims incurred" values may differ based on the negotiated discounts for such services. Greater discounts result in lower claim costs for similar services.

In-network utilization incentives -- Provide incentives for employees to utilize in-network providers where discounts are typically greater than out-of-network providers, thereby reducing the cost of incurred claims.

Ongoing employee awareness -- These programs include wellness programs, smoking cessation, and bulletin board literature. While the effects of these programs may be long term, there's no question the trend for employers is to advocate healthy lifestyles which will help offset excessive medical costs.

Education -- This component is a critical, but often overlooked factor in successfully managing your health insurance program. In order to leverage the foregoing factors successfully, employers and employees most be knowledgeable about their plan options and how to effectively use them. A well-defined plan will not provide the intended results if not executed properly. Everyone has a vested interest in properly utilizing their healthcare plan in order to minimize future premium increases.
 
Insurance companies operate under a fundamental principle: "The law of large numbers." The larger the pool of insured employers, the better they can manage or spread risk. Companies may incur increased premiums even with reasonably good loss ratios because other insured companies for that insurance carrier are underperforming. Thus a "trend" of increasing costs may be applied to keep the entire population reasonably profitable.

Other factors that may influence premium rates are more difficult to quantify. The impact may be significant depending on a number of variables:

• Increased demand for healthcare -- As the demand for healthcare increases the supply does not necessarily increase with it, especially within specific geographies.
• America's aging population -- Eighty million people will turn 50 in the next 10 years. The cost of providing health care to these individuals will be tremendous.
• Increase in uninsured care -- Almost 46 million Americans have no health insurance. The cost of providing care to these individuals is borne by taxpayers and insured consumers.

It will be difficult and challenging for small to mid-size employers to develop and manage the best healthcare strategies without some assistance. Each company typically has unique circumstances that call for a tailored solution. Most employers have limited resources and must focus on mission-critical objectives--running their businesses.

Your broker or agent should assist in determining the best strategies to implement and periodically review your progress to help meet your health plan objectives. It is difficult to make improvements if you lack the knowledge and are always playing catch-up. Since the broker/agent is compensated by commissions that increase with your premiums, employers must find brokers that have adequate expertise and are attentive to their client's long-term interests. The broker should be able to assist you in answering the question, "By how much?"

This article was authored through a collaboration of the SCMEP Health Insurance Partners of Kevin Hudson, John Adair and Doug Schuster. If you have any questions or would like health insurance assistance, please contact Kevin Hudson at khudson@scmep.org or 864-621-3710.