Should Your Company Stop Buying Health Insurance?

The Patient Protection and Affordable Care Act is making some employers take a look at self-funding their medical plans since some of the costs to comply for fully insured plans add 2-4% to the premium on top of the double-digit increases they would be getting anyway. Self-insurance can help reduce overall costs if your employees are relatively healthy and your medical loss ratios has consistently been low (typically less than 80%).  Stop-loss insurers of late have been willing to consider smaller companies (some will insure under 100 employees). For employers who choose to self-insure, they must evaluate which network to use and who will process the claims (a third party administrator (TPA) or an insurer who will ‘rent a network’).  Additionally, you will need to evaluate who will provide stop-loss reinsurance protection.

For those of you unfamiliar with self-funding or stop-loss insurance concepts, here’s how it works.  The TPA will process claims as they come in.  The employer pays the claims through the TPA (to comply with HIPAA).  Typically, you are able to save money just on the difference in administration costs between the TPA and your insurance company.  For added protection, you should purchase stop-loss insurance.  Stop-loss insurance does what it says.  It stops the loss (of dollars) when there is a big claim.  This is especially important if cash flow can be an issue for your company.  There are two types of stop-loss coverage and I recommend having both.  The first is Specific Stop-Loss, sometime referred to as “Spec”.  If a single large claim comes in, say a heart bypass surgery for $250,000, the spec coverage will limit the employer’s portion of the claim.  The employer can choose the level that they will be able to fund ($50k, $100k, etc.) and the stop-loss insurer will pick up the rest.  Obviously, the higher level the employer chooses to be responsible for, the lower the cost of the insurance.  The second type of stop-loss coverage is Aggregate Stop-Loss, or “Agg”.  This protects the employer from paying out claims for the plan year once a certain total claims level is reached.  This is usually expressed as a certain percentage over your expected claims volume, also referred to as a “corridor”. 

Unfortunately, too many employers (and their advisors) view stop-loss protection simply as a commodity and that all policies are the same. Buying based on the lowest price without getting all the of the policy details can be costly. I will share with you some cases that illustrate my point: A company I’ve been speaking with selected a stop-loss program that paid claims up to three months after the plan year, this is referred to as a 12/15 contract, which means that the insurance will cover all claims incurred in a twelve month period AND that are received in the 15 months from the start date. When a large hospital claim occurred in late December, a carrier audit process was triggered which resulted in the claim of $280,000 not being paid until early April, four months after the plan year-end and one month after the stop-loss contract provision. The company incurred the entire liability on that claim because although it was incurred during the plan year, it was not paid until after the 15 month period of the contract had expired.  Had the company chosen a longer term contract (with a slightly higher premium) they would have been able to limit their payout to the “spec” limit, which in their case was $50,000. 

Here’s another. A self-funded company was preparing for the renewal process, having recently learned of a large, ongoing $1 million a year claimant. The carrier providing the stop-loss on the program decided to exercise their right to “laser” (Dr. Evil finger quotes) the claimant, meaning that it would not provide stop-loss coverage for that employee. Given that there was a large ongoing claim, no other carrier would touch this company. Giving the carriers a lasering clause will reduce the premium, but it is a dangerous proposition when a large claim actually hits.

Here’s a quick list of questions to ask when considering self-funding:

  • What specific stop-loss level would you be comfortable with? Do you have the cash flow to pay a big claim?
  • What aggregate stop-loss level are you comfortable with? Is your expected claims projection realistic?
  • How long should incurred and paid periods be?  Choosing a short paid period could be costly.
  • Lasering – some policies state no lasers on renewal, but not all. Are you willing to pay for that protection?
  • Does the policy cover prescription drugs? Not all do.
  • How does the policy tie into your health plan’s summary plan description?

Pssssst. Your Drug Pusher Wants to See You.

Psst Go 90Actually, this post has nothing to do with illegal drugs.  Walgreens is introducing a new program called “Go 90” which will allow customers to get 90 days worth of a prescription at Walgreens pharmacies rather than having to get the 90 day prescription filled through a mail-order pharmacy. 

From the press release:

“One way to improve medication adherence and compliance is by allowing patients to receive 90-day supplies of chronic medications at their community pharmacy,” said Walgreens President and CEO Greg Wasson. “Today, some patients still are only able to receive a 90-day supply through a mail-order option designed by their prescription plan administrator. We are out to change that with our ‘Go 90’ program, which will inform eligible patients that they can receive a 90-day medication supply from their trusted community pharmacist. We also will be encouraging all prescription plan administrators to adopt this design to help both their clients and individuals save money, while improving patient health through proper medication adherence and compliance.”

The 90 day drug supply is a great way to keep people with chronic conditions (asthma, high blood pressure, diabetes, etc.) on their med regimen.  This should prevent these patients from having a lapse in their drug supply which could lead to a serious incident, such as a trip to the emergency room.  Many insurance companies provide discounted pricing for a mail-order 90 day supply.  The press release didn’t indicate if Walgreens would be able to honor the discounted pricing that some insurers provide for the 90 day supply, so make sure you check with the pharmacist before you get your prescription filled.

(This post was not sponsored or endorsed by Walgreens.  However, if they would like to sponsor or endorse this blog, please have them give me a call.)

One for All and All for One

Health purchasing co-operatives for 501(c)3 organizationsIn the state of Illinois, there are a couple of laws on the books that allow for organizations to band together for the purpose of providing insurance coverage to members. There is an inter-governmental law that allows municipalities, counties, school districts and other units of government to form co-operatives to insure (or self-insure) various risks. These include work comp, property and health care. There is also the Charitable and Religious Risk Pooling Trust Act which allows for 501(c)3 organizations and religious institutions to insure (or self-insure) various risks including work comp and property – but not healthcare. Finally, there is a law that allows for private employers to come together and form a health insurance purchasing group in order to buy insurance for their organizations (this law does not allow self-insuring).

Why would any employer or organization want to combine with others to purchase insurance? The main reason most do it is to create a larger population group. A larger population results in more stable insurance rates, partly because of a smoothing out of claims experience due to the law of large numbers. It is much easier to predict the number and amount of claims in a group of 1,000 than it is in a group of 10. Additionally, it levels out the insurer’s profit margin for fully insured groups. An insurer builds in a larger profit margin on small groups because of the additional risk (lack of predictability) in insuring them. Again, the larger a group is, the more predictable the risk becomes, which in turn lowers the risk premium (profit margin) that an insurer needs to build into the contract. Self-funded co-operatives are able to remove this ‘risk premium’ entirely, resulting in an immediate reduction in cost.

A group purchasing co-operative could also benefit its members by using its group purchasing power to provide additional services, such as wellness programs, at a cost lower than small individual groups could get on their own. Currently, I am working with not-for-profit organizations in the Chicago metro area to form a health insurance purchasing co-operative. It is hoped that we can reach a sustainable number of participants over a set period of time so that the purchasing co-operative will become an attractive target for a large number of health insurers, or that the regulatory environment allows for the co-operative to eventually become a true self-funded entity. If you would like more information about this health insurance purchasing co-operative, please contact me.

The Secret of Health Insurance Quotes

The mysterious health insurance black boxMost people are mystified by the quoting process that health insurer’s use.  I have to admit, it isn’t an easy process to understand, even for someone who has been in the industry for years.  As I’ve mentioned in the past, the insurance companies employ actuaries to access the risk of an individual or group based on a number of factors.  The factors include the groups demographics (age, sex, etc), health status and geographic location along with the probabilities of certain incidences occurring in the general population.  Then they put it all in a black box, add water and stir…and out pop your insurance rates!

Rates vary company to company and from individual to individual.  However, once they are determined (here’s the secret) the differential in rates across plan design remain the same.  Let me illustrate.  Company ABC has individual rate of $360.00 and Company XYZ has an individual rate of $400.00 based on the factors described above.  Both have the same plan design, in this case a PPO with a $500 deductible, $2000 out-of-pocket limit, 90/70 co-insurance, $20/$40 copays and a $15/$35/$50 drug benefit.  Given that the plan design is the same, any variable of the plan that is changed should effect both companies’ rates by the same percentage.  For example, moving the deductible from $500 to $1,000 will result in the same decrease in individual rates for the company.  As a rule of thumb, each $500 change in deductible will result in a 5% change in premium.  So, in this case, ABC’s rate would fall to $342 and XYZ’s rate would become $380.  Simple right?

The PPO plan design changes that will affect your rates the most are 1) the deductible – this has the largest affect, 2) out-of-pocket expenses, 3) co-insurance, 4) office and ER co-pays and finally 5) drug co-pays.   The reason that deductibles and out-of-pocket expenses affect your rates the most are because they effectively shift the risk away from the insurance company and toward the covered individual.  Over the course of a year, the insurance company has a range of claims that it expects to pay out on your group based on your demographics and health conditions.  If you are a large enough group, the insurance company doesn’t need detailed health histories, because they can rely on their actuarial tables (the probabilities in the total population).  As a result of knowing the range of claims, the can determine approximately how much less they will have to pay based on a change in deductibles, copays, etc.  Because of this, the percentage change in premium based on a plan change is basically the same for all groups.  This rule tends to become less true the smaller the group we are talking about becomes. 

Obviously, there are several ways to improve your health insurance quote/renewal.  The first is to improve your demographics.  How do you do that?  Well, you could hire healthy young males and healthy middle-aged women.  Both of these groups tend to have lower health care expenses, however you could run afoul of the Department of Labor with discriminatory hiring practices.  Or, the other thing that you could do is to improve your company’s overall health.  This is a little harder to do , as it requires changing people’s behaviors, but it can be done through focused wellness programs.  Of course, you can’t focus on what type of wellness program to implement until you know the general health status of your company.  If you’re not self-insured it can be difficult to understand what health conditions are driving the costs.  That is why it is important to start with a Health Risk Assessment before introducing a full-blown wellness initiative.  Typically, we like to pair the Assessment with a blood draw.  This not only gives us information about a your populations behaviors, but also gives us hard facts through the blood panel.  If you would like more information about how wellness programs can help your company control health care costs, drop me a line.

States, School Boards – Cutting Benefits

I need a new drugI came across two interesting articles recently.  Both concerned health plans sponsored by government.  First, the State of Nevada, which is facing a shortfall of over $110 million just to support existing benefits for its employees, slashed benefits dramatically AND increased the employees’ share of premiums.  Here’s what they did: They got rid of almost all dental and vision benefits. Cleanings and x-rays are still covered and an annual eye exam is covered, that’s it.  They also took an axe to the medical insurance.  Here they raised the employee deductible from $800 to $2,000 for individuals and $4,000 for families.  Out of pocket maximums increased to $3,900 for individuals / $7,800 for families.  Co-insurance, the amount the plan pays after the deductible is met, fell from 80% to 75%.  They also cut the state-paid life insurance benefit for employees from $20,000 to $10,000.  Doing all of that, they managed to save $80 million dollars.  The other $30 million will be paid for by state employees in the form of higher premiums.  Got that?  The state was short on funds so they cut benefits AND raised employee premiums.  Needless to say, this is NOT going to be considered a grandfathered plan.   State of Illinois employees better take note.  Our state is in even worse financial shape and most State of Illinois employees get a plan that costs them $47 – $85 per month with a deductible between $300 – $450.   Those are nice benefits at very little cost to the employee.  Don’t get used to them however, you state government workers.

The second story concerns the Milwaukee area school district.  Facing budget shortfalls, the district gave layoff notices to over 400 school teachers in June.  Back in 2005, in order to save money, the district cut one benefit from the health plan.  They excluded erectile dysfuntion drugs (e.g. Viagara) and saved over $200,000 that year.  This year, the teacher’s union has filed suit to get jobs back AND to get their e.d. drugs back.  Adding e.d. prescriptions back to the plan is estimated to raise costs by more than $750,000.  Sure, that’s a drop in the bucket for a health plan that spent over $1.3 billion dollars last year, but the district does need to cut expenses.  Adding a million bucks back to the budget is going the wrong way.  Besides, wouldn’t the union want some of those jobs added back over getting their little blue pills? 

So it’s not just private employer health plans that are hurting.  As taxpayers, we should all be aware of what public employees (state workers, teachers, police, fire, village officials, etc) get for benefits.  After all, we are paying for them.

Health Insurance Rates to Come Down in 2011?

An apple a day keeps the doctor awayThe Wall Street Journal is reporting this week that insurance companies are seeing a trend this year that they haven’t seen before.  At least, not in quite some time.  For the first time in a long time, insured Americans are using fewer medical services.  And it could mean lower health insurance rates in 2011.

WellPoint Inc’s CEO is quoted as saying, “Utilization is lower than we expected, and it’s unusual.”  And he’s not the only one seeing the change.  Aetna and UnitedHealthcare reported lower utilization in the first and second quarters of this year during their earnings conference calls.  Additionally, CVS Caremark, the drugstore giant, says they are seeing fewer prescriptions being filled.  Quest Diagnostics, a laboratory testing company, has had descreasing patient volumes over the first part of 2010 as well. 

Fewer people are going to the doctor this year

What is causing this decline in utilization?  Obviously, the economy is playing a large part in it.  As people look to save money, they put off going to the doctor or having elective surgery or, perhaps, even forgoing their medication.  Another reason we are seeing a decrease in utilization is that many people who were on COBRA due to the government subsidy are now coming off of it.  The subsidy is no longer being offered to the newly unemployed.  Another reason could be the increase in High Deductible Health Plans, such as HSA’s.  Because more people are responsible for the up front costs of medical services, they could be putting it off.

It will be interesting to see if these trends reverse in the second half of the year.  Perhaps as those folks with high deductibles hit their limits, there will be a jump in utilization.  Maybe the economy improves, more people get jobs and start to take advantage of their health benefits again.  BUT…if the trend of lower utilization continues…we could be looking at a flat health insurance market in 2011.  Maybe a less aggressive health consumer is here to stay. Maybe we might even see insurance rate decreases. 

Hard to believe?  Aetna’s CFO is quoted as saying, “If utilization stays down, it will have a favorable impact on rates.”  So stay tuned and remember, an apple a day…

Free Preventative Care Coming to Your Health Insurance (but not to “Grandfathers”)

Grandfather status health plans don't have to comply with preventative coverage requirementStarting September 23, any new health plan (or plan that renews after that date) will be required to provide preventative services with no cost sharing.  That means if you have insurance your policy will have to pay 100% of these services and not be able to charge you a deductible, co-pay or co-insurance.  While this is good for people, everyone should do as much as they can to stay healthy, this will add an estimate 1.0 – 1.5% increase to the cost of health insurance. 

So what preventative services will be covered?  Here is a list:

  • Annual physicals
  • Blood pressure, diabetes and cholesterol screenings
  • Routine vaccines for diseases such as measles, polio, or meningitis
  • Flu and pneumonia shots
  • Regular well-baby and well-child visits, from birth to age 21
  • Screening for conditions that can harm pregnant women or their babies (including iron deficiency, hepatitis B, a pregnancy related immune condition called Rh incompatibility, and a bacterial infection called bacteriuria)
  • Screening for obesity, and counseling from your doctor and other health professionals to promote sustained weight loss, including dietary counseling from your doctor
  • Annual mammograms for women over 40
  • Regular Pap smears to screen for cervical cancer and coverage for the HPV vaccine that can prevent cases of cervical cancer
  • Screening tests for colon cancer for adults over 50

 Just as an added note, if your health plan is “grandfathered”, it does not have to comply with this new regulation.  Grandfathered plans are those that were in existence prior to March 23rd of this year and have done nothing to lose their grandfathered status.  This is a list of ways your plan could lose it grandfather status.

How are Employers Responding to Health Care Reform?

A new survey published in May by the International Foundation of Employee Benefit Plans, Health Care Reform: What Employers Are Considering, examines how more than 1,000 employers, representing over seven million lives, are reacting to the legislation and the strategies they are implementing within their organizations. Companies responding ranged in size from “small” employers with fewer than 500 employees to large companies with more than 20,000 employees. The survey is the first in a series of surveys by the Foundation that will look at health care reform’s impact on employers.

Some of the findings are quite interesting.  For example, 87% of employers agree that their organizations will continue to offer health care benefits because they are critical to employee recruitment, retention and remaining competitive.   That’s good to hear.  I wonder who the other 13% of employers are and how they plan to tell their employees that they will no longer be offering health benefits.

Other findings:

  • Two thirds (66%) of employers agree that their organizations will take advantage of the new legal provision that will offer increased levels of financial incentives available to employees who participate in employer-provided wellness programs; 9% disagree, and 25% are not sure.
  • Almost half of all respondents (48%) are focusing on redesigning their health plans so that by 2018, their plans will avoid triggering the excise “Cadillac” tax for high-value plans.
  • One in five employers (21%) is planning to add or increase emphasis on high-deductible health plans in the next 12 months. Close to 70% of these employers are likely to focus on account-based plans linked to health savings accounts.
  • Of employers whose plans currently include lifetime maximum provisions on essential benefits, only 4% are removing lifetime maximums before they are required to do so, 86% are not making changes until required, and 10% are not sure. Likewise, 4% of employers offering plans with annual maximums are removing them before they are legally required to do so, 84% are not making changes until required and 12% are not sure.

So, as an employer, how are you going to respond to health care reform?  Have you spoken with your benefits consultant or broker about what health care reform means to you?

What is REALLY Driving Up the Cost of Health Care?

The cost of health care in this country, as everyone knows, is increasing at a rate higher than the current rate of inflation.  In 1990, total health expenditures in the U.S. were $714 billion.  In 2008, they were $2,338 billion (that’s $2.3 trillion)!! Why?  What is causing this rapid ascent?  Is it doctor’s greens fees or an increase in the cost of latex gloves? 

When I was in college, my economics professor told us that price is determined by the intersection of supply and demand. Well, demand has increased as the baby boomers have aged and the supply of doctors and hospitals has probably not grown fast enough to keep up with demand.  But that cannot account for the tremendous increases in costs we’ve seen in the last two decades. 

Baby boomers and the increased use of pharmaceuticals are often cited as the culprit, spending on drugs has almost doubled since 1990, but 52% of health spending result from hospital and physician expenses.  According to a Blue Cross Blue Shield Association study, the driving forces are investments in new technology and market consolidation.  From experience, I have seen local hospitals start to specialize and build units like heart hospitals.  Also, there have been hospital build-outs or ‘rebuilds’.  Anyone in the Elgin area can tell you about the new Sherman hospital and anyone who’s travelled the Eisenhower expressway can tell you how great the new Rush University hospital looks.  Additionally, the BCBSA study found that “in some cases merging hospitals is associated with price increases of 20 percent to 40 percent” and that “every one percent increase in hospital market share from consolidation leads to an approximate two percent increase in inpatient expenditures.”

2008 National Health Expenditures (click to enlarge)


And from a technological standpoint, knee, hip and other joint replacements have increased the use of X-rays and MRIs.  Heart stents have improved (and increased the cost of) outcomes for heart patients.  And of course, the treatments for cancer and other life threatening diseases have benefited from technological advances.  So, part of the issue is that as we get better at treating injury and disease, the cost of the tools used has increased as well.

Many people have cited malpractice and malpractice insurance as a major driver of cost.  Tom Baker, a professor of law and health  sciences at the University of Pennsylvania School of law, cites a study by Towers Perrin.

…medical malpractice tort costs were $30.4 billion in 2007, the last year for which data are available. We have a more than a $2 trillion health care system. That puts litigation costs and malpractice insurance at 1 to 1.5 percent of total medical costs. That’s a rounding error. Liability isn’t even the tail on the cost dog. It’s the hair on the end of the tail.

Back to prescription drugs for a moment.  Prescriptions as a percentage of total expenditures doubled in twenty years, but expenditures tripled in that time.  That means that the total amount spent on drugs went from almost $40 billion in 1990 to over $230 billion, a 575% increase!  Why so much, so fast?  According to Kaiser, three factors are responsible: more prescriptions are being written; newer and more expensive drugs are replacing older less-expensive ones; and manufacturers are increasing prices. In 1993, there were nearly 7 prescriptions per person written in the U.S.  As of 2008, that number has climbed to almost 11 prescriptions per person, while the population has grown from 240 million in 1990 to over 300 million today. 

Seems to me, if we are truly to get real health care reform, we need to start focusing on health management instead of sickness management.  All of us need to start taking greater responsibility for our health and ensure that we are doing all we can to be healthy.

Is Your Insurance Company Paying Your Health Claims Correctly?

insurers processing claims incorrectly 20% of the timeThe AMA came out with a report yesterday that said that one in five medical claims is processed incorrectly.  The AMA claims that over $770 million in doctors’ administrative costs could be saved if the health insurance industry improves claim processing by one percent! Keep in mind, this amount doesn’t include the out of pocket money that patients could save if the claim is processed correctly. 

The report looked at seven of the largest health insurance companies for timeliness and accuracy of payment.  Here are the accuracy results of the insurers that operate in Illinois:

  • Aetna                             81.23%
  • Cigna                             84.51%
  • HCSC (Blue Cross)    87.83%
  • Humana                        82.92%
  • United Healthcare      85.99%

This report drives home how important it is for everyone to check their Explanation of Benefits.  Explanation of Benefits (EOBs) are usually sent via mail and can be checked on-line at most insurer’s websites.  They will explain the amount that was charged, the discount that was applied, the amount the insurance company paid and the patient’s responsibility of charges.  Your broker should help you with any claims issues you may have.

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