Health-care cost increases are back, and they could go even higher. Heres how to keep the lid on costs without sacrificing quality.
Big changes are taking place in health care that can have an equally big impact on the amount of money companies pay for employee health benefits, an expense that, in turn, is likely to have a significant impact on those companies bottom lines. For one thing, health-care cost increases are back. Total health-plan costs for active and retired employees rose 6.1 percent in 1998 to $4,164 per employee, and companies anticipate average increases of 9 percent for 1999, according to the 1998 Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans.
At the same time, the health-care marketplace is undergoing tremendous change and consolidation as financially troubled managed-care organizations leave the marketplace or merge with other plans. And finally, as federal lawmakers ponder various forms of incremental health-care reform, companies may see additional cost increases. "If incremental health-care reform requires more choice in provider, employers will bear the brunt of the costs," according to Susan Snyder-Bass, benefits consultant with Buck Consultants in Atlanta.
In this uncertain environment, cost-conscious companies should take a hard look at their health-care plans. "In many cases, health plans are a companys largest unaudited expense, so companies need to take control of the management of these plans," said Rik Lindahl, a senior consultant in the Dallas office of Watson Wyatt Worldwide. The following seven steps can help guide this process.
1. Look At the Big Picture
Having a five-year plan for health-care benefits is not a viable strategy in this volatile environment. Companies need to keep a close and continual eye on their health-care benefits with a one- to three-year strategy. And although costs are certainly going to head the agenda, it is important that companies take an in-depth approach to that cost consciousness by understanding what drives health-benefit costs in their companies. For example, prescription drug costs for most companies are increasing at almost double the rate for health-benefit costs overall. Therefore, these companies should look at cost-containment approaches for those benefits and other trouble spots.
Understanding employee demographics is also important. Employee turnover and an aging workforce are likely to create subtle but important demographic changes to employee populations that, in turn, will affect the drivers of benefit costs and strategies for controlling or managing those costs. For example, a company whose demographics have shifted toward older employees can implement a disease-management program to handle employees with chronic conditions, such as diabetes and high blood pressure, that become more frequent as employees age.
2. Review Plan Design
Next, take a hard look at plan design. After all, plan design tells employees where and how to seek care. For example, a few years ago, plans battled skyrocketing inpatient care charges by steering patients toward outpatient care by offering higher coverage rates for this and other cost-effective means of care. Today, however, the opposite is true. Providers have increased the cost of outpatient care so much that inpatient care is often the more cost-effective option. However, unless plan design has changed to reflect this, the company may inadvertently steer employees to more expensive care options.
Plan design is also an important tool in determining eligibility for discounts based on volume. Companies may be able to negotiate hospital network discounts of up to 50 percent to 60 percent based on their ability to produce a certain volume, but those discounts will not pay off unless the promised volume is delivered. If discounts are modeled on 90 percent of employees using that network, but the actual amount of business is only 70 percent, that will have a negative impact on the discount. Therefore, companies can use plan design to steer employees to that network by providing a higher reimbursement rate or some other incentive.
Employee behavior can also indicate shortcomings in plan design. For example, companies should look at how much care is provided in and out of the managed-care provider network. "If the amount of out-of-network care is higher, it may be a sign that something is wrong," said Eileen Raney, principal and national practice leader for the integrated health group at Deloitte & Touche LLP in Los Angeles.
Examining plan design also means rethinking whether to contract out a particular benefit separately from the rest of the plan, more commonly known as carving out benefits. For example, if a company currently carves out certain benefits, it needs to make sure that approach is still viable. Is the company still saving money, and are the vendors administrative costs reasonable? By the same token, companies that have not explored carving out certain benefits might want to see if that approach represents significant cost savings.
Companies should also make sure that all the health-benefit plans they offer serve a current need. In some cases, employers just keep updating plans without determining whether those plans meet strategic needs. "Its always been there" is a frequent reason for this oversight and overlooks the fundamental truth that a companys health-benefit goals and strategy change over time and so must benefit plans. "Companies should look at their life insurance and short- and long-term disability plans, as well as their core health benefits to identify and eliminate legacy plans that no longer serve a purpose," said Lindahl. He cited an organization that had kept a certain disability plan in place since it was a small 200-employee company. As it changed and grew, the company put in new plans that rendered the original disability plan redundant. No one had considered eliminating the unnecessary plan until challenged to figure out its strategic need. "This happens frequently but not necessarily in the primary health plan," he said. "Secondary plans often are not needed, and large and sophisticated plans have many such legacy plans in place."
3. Continually Evaluate Managed-Care Plans
Companies must understand how they are likely to be impacted by widespread consolidation of financially troubled managed-care plans. Therefore, when choosing a managed-care plan, focus on economics, the overall stability of the plan, and its customer service capabilities. "Managed-care plans have been buying market share by keeping premiums lower than their losses," said Tom Beauregard, a principal and practice leader with Hewitt Associates LLC in Rowayton, Conn. "As a result, plans are exiting the market or going bankrupt."
"Because the majority of HMOs are not making a profit, companies should start asking for their risk-based capital ratio which shows the relationship between retained risk and guaranteed rates," said Raney. "This is mandatory in many states." She also recommends that companies examine the results and audited financials of publicly traded plans.
Financial instability is not the only problem managed-care plans face. Even previously well-regarded plans may have fallen on hard times as a result of mergers or other organizational changes. Many plans experience strained relationships with providers and, as a result, may undergo a significant change in the makeup of their provider networks that can greatly affect quality measures, patient satisfaction and even access to care. Therefore, companies should ask certain questions of their managed-care plans: Is the turnover rate among network physicians too high? Is the company getting the necessary resources for its account? Is the quality of service acceptable? Have there been excessive changes in the claims systems? Has the plan managed the changeover to minimize disruption? Is the new managed-care entity recognizing all prior agreements with the previous vendor? "Make sure that if the relationship changes because of a merger, you are still getting the same deal," said Lindahl. "If initial agreements are unclear, companies may see unpleasant surprises."
Overall, companies should continually evaluate providers using relevant criteria, such as access (network providers within a certain number of miles for urban, suburban and rural populations); percentage of board-certified physicians; outcome measures; and patient satisfaction. This way, companies ensure that they are working with the right plans. "A few years ago, companies just wanted managed care to manage costs," said Barry Barnett, a principal with the Kwasha HR Solutions division of PricewaterhouseCoopers in Teaneck, N.J. "Now they are more concerned about quality of care."
4. Negotiate With Plans and Providers
When negotiating with providers or managed-care plans, companies can gain leverage by limiting the number of plans they offer employees. "Having just 200 employees in a plan can get you leverage," according to Beauregard. "The managed-care market is so fragmented that this is a significant population." If a company is self-insured, it may want to limit its provider network to gain more leverage with providers and to eliminate inefficient providers.
During negotiations, companies should also require a longer notice of renewal rates. Most managed-care contracts offer only 30 days notice of renewal rates. If there is a significant rate action, it can be difficult to act in 30 days. Because of the disruption to employees any provider or plan change is likely to cause, companies need adequate time to develop employee buy-in, typically 60 to 90 days or longer. "Changing and negotiating plans is a lot easier to handle when you are not under pressure," said Lindahl.
5. Audit Claims
It is always a good idea to monitor the performance of vendors, particularly if the company has negotiated vendor performance guarantees. Such guarantees impose a financial penalty on vendors that do not meet certain performance standards. Some such guarantees focus on whether the plans administrative process is timely and financially accurate. Other guarantees revolve around customer-service requirements and patient satisfaction. If a plan falls below acceptable standards, employers should not only collect on performance guarantees, they should require the plan to specify how it will improve in those areas.
Self-insured companies should periodically pull about 250 random claims to measure the performance of third-party administrators (TPAs). This audit will require that companies recalculate those random claims to see if they were paid correctly, were financially accurate, followed the appropriate payment procedure, contained the right coding, and paid the right people. This audit should be followed up by a review of the TPAs operation. "You want to make sure it has the right anti-fraud procedures in place, that it is on the lookout for fraud and abuse by providers, and that it is effective in doing so," said Raney.
This is also the time to review the performance of medical management and utilization review subcontractors. In this case, auditors would be looking at statistics like length of stay. Companies can send registered nurses on site to audit a case-management provider by reviewing a sample of files to determine if the utilization review or case management provided was appropriate. From a financial standpoint, companies should be looking at the amount of money these providers save the company. "Are these providers managing the right cases with the right result? Case management should bring in $4 in savings for every $1 spent," said Raney. "If it is not, companies are not getting a high enough return on their investment."
Some companies conduct such audits on an annual or biannual basis. "It depends on results," said Raney. "If 99 percent of claims are financially accurate, the TPA is meeting the standard." If an audit reveals trouble spots or a company does not want to undertake a full-scale audit, most TPAs will provide monthly or quarterly reports. It is also important to be alert for signs of trouble. For example, if claim turnaround times slow down, it may be a red flag.
6. Benchmark Plans
Periodically benchmark health-benefit plans to gauge their competitiveness. Health-benefit plan costs should be benchmarked using the companys geographic peers of similar size because health care is geographically focused, said Raney. However, when benchmarking plan-design characteristics, such as eligibility criteria and employee contribution requirements, companies should compare against industry peers.
7. Keep Current on Regulatory and Legislative Changes
Nothing can reshape the health-care landscape faster than legislative change. In fact, many in the health-care industry see more incremental health-care reform on the horizon. Many bills call for greater freedom of choice for individuals covered by employer-sponsored plans. Proposals with perhaps the most potential to shift health care are those that pierce the Employee Retirement Income Security Act (ERISA) shield. These bills propose that companies could be sued by employees for malpractice under state law because of the health plans they offer. If such a proposal became law, companies might stop providing health-care coverage directly and shift to a defined contribution approach in which individual employees purchase their own coverage with vouchers or subsidies provided by employers, said Beauregard.
With the types of health-care reform bills being considered today, companies would be well served to pay close attention to these developments. No matter what employers do in this environment, they need to keep their long-term strategy in mind. "Avoid knee-jerk reactions to rate increases," warned Barnett. "Be proactive."