The Changing Health Care Landscape
Compass on Business Magazine Feature

Is the landscape truly changing or is it simply a case
of shifting sands?

Every year, in an annual rite that might be called "the dance of the deductible," Ron Springer engages in rounds of negotiations with various health care insurance providers when his company’s policy comes up for renewal. While some aspects of the interaction have changed over the years, the vice president of Western Communications, with locations in Austin, Del Rio, Eagle Pass and San Angelo, Texas, says one thing never does: "The cost always goes up."

In the ongoing debate about the current state and future direction of health care in this country, there’s not much all parties agree on, but Springer’s observation draws few dissenters.

The good news for employers on the pricing front is that the annual rate of increase—which hit 14.7% in 2002, according to the National Survey of Employer-Sponsored Health Plans, conducted annually by New York City-based Mercer Health & Benefits LLC—took a downward turn in recent years. The bad news is that costs are still climbing at about two-and-a-half times the rate of inflation, and the trend of slow-climbing rates shows signs of having bottomed out.

Benefits of Offloading Risk
However, employers are finding something to cheer about in another emerging health care trend—one that, ultimately, could result in real-dollar reductions to their cost of providing coverage for employees. Ken Janda, vice president of Houston-based Compass Consulting and Benefits, describes it as "the movement toward consumerism."

A major part of this trend involves companies offering employees a choice among different levels of health insurance to buy. "Health insurance is not a one-size-fits-all proposition," Janda said. "By making three or four different levels of coverage available, companies give employees the ability to decide what’s right for them, based on their own level of risk tolerance, income, family situation, etc. They can decide to have less money come out of their paycheck and have more cost-sharing when they need health care, or vice versa."

In general, employers are moving toward a defined contribution rather than a defined benefit approach in health care, mirroring the trend that has increased the use of 401(k) plans rather than traditional pension funds in retirement programs. While almost every employer Compass Consulting and Benefits works with is asking questions about how and when to make that shift, Janda said, "The adoption rate has not been as fast as we thought it would be, although it continues to grow and is on the table with every employer." Mercer’s research reflects the same trend. According to the company’s 2006 survey, enrollment in consumer-directed account-based health plans—the least expensive type of medical plan, by far—is increasing. Although its impact is still small, this trend is lowering the average cost-per-employee for health care at companies adopting the plans.

The largest employers are at the forefront of the consumer-directed health plan (CDHP) movement, but it is gaining traction in all segments (see "Consumer-Directed Health Plan Expected Gains" chart, page 12). After conducting an extensive, first-of-its-kind primary research project on CDHPs in 2005, consulting firm McKinsey & Co. characterized this trend as, "arguably, the most important development in health insurance since the widespread introduction of HMOs in the 1980s."

The movement toward consumerism is just the latest manifestation of a broader trend of cost- and risk-shifting from employers to employees in health care, again, reflective of what’s taking place in retirement planning. Traditional cost-shifting tactics include having employees pay a larger share of their health insurance premiums and raising deductibles, patient co-pays and out-of-pocket maximums.

However, cost-shifting to employees played a lesser role in reducing health benefit cost increases in 2006 than it did in previous years, and that may be one reason behind the flattening of reductions in health care cost increases. The annual increase in average total health benefits cost declined from 14.7% in 2002 to 10.1% in 2003 to 7.5% in 2004, according to Mercer. It fell again, to 6.1% in 2005, but stayed at the same level in 2006.

Does Consumerism Work for the Consumer? "So the multi-million-dollar question for employers is: If cost growth in health benefits has stopped slowing, will it now start to accelerate?" says Blaine Bos, a worldwide partner at Mercer Health & Benefits and one of the survey’s authors. "With less cost-shifting to employees going on, we’ll see how well the leading-edge strategies for longer term cost management—care management and consumerism—are working."

Figures vary on current enrollment levels in CDHPs, but they are all low relative to traditional comprehensive plans, such as PPOs and HMOs. The Employee Benefit Research Institute (EMBRI) estimates just 1% of individuals covered by private health insurance were enrolled in consumer-directed plans in 2006, with another 7% participating in high-deductible health plans (HDHPs) with no related account. Mercer’s latest survey puts CDHP enrollment at 3% of all covered employees.

Bos noted that some industry watchers cite the relatively low enrollment levels for CDHPs as evidence that employees are not accepting the consumerism model. "But a three-fold increase in one year suggests otherwise," he added.

Indeed, some studies do suggest a lower level of satisfaction for employees enrolled in CDHPs and HDHPs than for those in more comprehensive plans. In the EMBRI study, about 65% of employees covered by CDHPs were very or somewhat likely to recommend the plan to a friend or co-worker, versus 82% for those covered by a traditional plan.

However, the same study found that individuals in CDHPs and HDHPs exhibit more cost-conscious behavior in their health care decision-making, which is the exact objective from an employer’s point of view.

Janda suggests that employee resistance to consumer-driven health care plans can be overcome if the concept is presented in the right way. "People like having choices, and when you start explaining the consumer-driven model to a roomful of employees, you see a lot of heads nodding," he said. "They know they haven’t been good consumers in this area, because there’s been no incentive for them to be. When all the options and benefits are communicated to employees in the right way, it can be perceived as a very positive thing."

Real-world experience bears out Janda’s proposition, at least anecdotally. Lubrication Systems Co. (LSC), which has offices in Baton Rouge, Louisiana; Houston, Texas; Pattaya, Thailand; Beijing, China; and Manama, Bahrain, began offering a Health Savings Account (HSA) tied to an HDHP as an alternative to its traditional PPO plan two years ago, and the majority of its more than 80 employees have enrolled in it.

"We’ve had no complaints about the new plan, and the number of employees choosing it over the traditional plan seems to speak for itself," said Jan Cock, human resources manager at the company. "It lowered the premiums they have to pay, the company contributes a small amount to their HSAs each pay period and they have the option of contributing to the accounts themselves or not."

LSC’s objective was to lower its insurance costs while still providing its employees with a good plan. "We put control and choice in the employees’ hands," Cock said. "We believed the financial incentives would motivate them to become better health care consumers and to shop wisely for health care just as they do for everything else, and that’s exactly what happened. We’ve seen a reduction in our health care costs, and we share those savings with our employees."

One factor behind the disparity between the percentages of large and small companies offering CDHPs and the plans’ anemic enrollment levels so far has been the lack of options available to smaller employers. But that may be changing.

Western Communications currently offers coverage from BlueCross BlueShield of Texas to its 16 employees, paying 75% of the premium for workers with one to three years of tenure and 100% after that. Employees pay their own dependent premiums.

"Every year when our insurance comes up for renewal, the premiums are always going up," Springer said. "The carriers we interview tell us what it would cost to keep our existing level of coverage and present options to keep the premium the same or lower. Those options always involve giving something up, such as accepting higher deductibles or changes to prescription benefits, so every year it is a juggling act that gets harder to do."

The company has looked at options such as CDHPs and HSAs and is open to the concept of consumer-driven health care, but so far it has been unable to find an acceptable plan. "One of our problems is that we are in three different towns, and in two of them, we don’t have the same health care providers," Springer said. "We continue to look at everything that’s offered each year, but we have to be able to provide coverage for employees at all our locations."

That problem may soon disappear for companies like Western Communications, as the number of carriers offering CDHPs and the variety of plans available continue to climb. An April 2006 report on CDHPs by the U.S. Government Accountability Office found the number of carriers offering plans more than tripled in a six-month period through March 2005, and that 93% of carriers surveyed that year planned to offer CDHPs within the next year.

HSAs are at the core of those plans (see the "HSAs: Pivotal to CDHPs" sidebar). "HSAs are still relatively new, but we are already seeing them quickly grow in popularity in the early stages of their existence," said Rep. Bill Thomas (R-CA), Chairman of the House Ways and Means Committee in 2006. "The adjustments in the Tax Relief and Health Care Act of 2006 will make HSAs more attractive as Americans consider their health insurance options."

Denver-based Centennial Container, Inc. is one of the growing number of companies turning to HSAs as a possible solution to skyrocketing health care costs. It began offering them about two years ago, and about half of its dozen or so employees have enrolled. While there is a lot to like about the plans, says Jim Noon, Centennial’s owner, so far they present only a partial solution.

"They are great for single people, but they’re not so family friendly," Noon noted. "We have a $2,000 deductible on our HDHP, which is not much different from some traditional plans out there. It’s no big deal for a single person to meet that deductible, but in a family situation it has to be met for each family member. With a family of five, say, you’d be looking at $10,000 in deductibles."

Still, Noon remains a fan of CDHPs. He believes they accomplish their main objectives of making employees better health care consumers and reducing overall health care costs, and he’s hopeful that the insurance industry and/or regulators will find a simple solution to the deductibility issue that will make them more family-friendly.

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