Wish That Group Health Insurance Wasn’t So Expensive?
Part IV: Mix And Match To Lower Your CostsByRaymond D. Matkowsky
The most flexibility you will have in designing coverage that will lower your premium is in the manipulation of deductibles, co-payments, co-insurance and your total out of pocket costs. Maximum out of pocket costs are more important than any other factor.
Keep in mind that maximum out of pocket costs can easily exceed deductibles. For example, a $2,500 deductible plus a 30% co-insurance on a $10,000 hospital bill will be $5,500. If the maximum out of pocket was $10,000, the patient would be responsible for the full $5,500. If the maximum out of pocket was $5,000, then this is all the patient would be responsible for.
When designing your plan, it is extremely important to pay careful attention to total out of pocket costs. According to the Internal Revenue Service, the number one cause of bankruptcy in the United States is medical bills that exceed $17,000. A single employee’s bankruptcy can have a devastating effect on your business and the smaller your business is the greater the effect.
Like the structure of a house, you must start to build your insurance policy on a foundation of core benefits. We recommend that you start with a PPO policy that has a maximum out of pocket value that you and your employees are comfortable with. It is not recommended that you start with an HMO policy. Many HMO policies are sold on a “take it or leave it” basis that restricts the choices you can make. Furthermore, you may be able to design a PPO policy that carries a lower premium than the lowest HMO offered.
One more advantage associated with a PPO plan is that according to a “Survey of Employer Sponsored Health Benefits” taken by the Kaiser Family Foundation in September 2007, they had the lowest increase in premiums (5.3% compared to an overall average of 6.1%).
Review Your Company’s Claim History
It is illegal in most localities in the United States for an employer to review an employee’s medical records. However, this does not preclude you from obtaining a summary of your workforce’s insurance usage.
Reviewing your company’s claim history will help you to make the informed decisions needed to manipulate the various factors that effect insurance rating calculations. It may also turn out that you find that your employees have been pretty healthy and actually used their coverage much less than anticipated. If so, it might pay to ask your present carrier to recalculate your rates based on your observations. The risk, of course, is that if your employees are sicker than anticipated you may be hit a higher increase.
If your review indicates that only a few of your employees use primary care regularly, you may want to save on premiums by increasing doctor visit co-pays. If you have a young workforce and few if any hospitalizations, you may want to opt for increased deductibles. Each situation is individual and the mix you choose may not be right for the business next door.
Putting It All Together
In order to start developing your plan you need to build a favorable foundation from the ground up or choose an existing policy to build on. You may find that the cost of various policies to be unexpectedly different. For example take two policies, plan A and plan B. Plan A has a $2,000 deductible and a 20% co-insurance with a maximum out of pocket expense of $5,000. Plan B has a deductible of $5,000 and a zero co-insurance. Plan A costs $3,800 per month. Plan B costs $2,900. The potential maximum out of pocket for both is $5, 000 yet plan B costs $10,800 less per year. You’re looking for this type of relationship.
If you can locate an existing policy that gives you the core benefits you need and upon which to build further, this might be your preferable route. Since the plan would already exist, the insurance provider should be able to offer you a quote very quickly. Use this quote as a starting point for your additional modifications.
For example, to further reduce your premiums, you can increase plan B’s deductible and add a co-payment. You may be able to decrease your premium by 5 to 7% for every $250 increase in deductible and 5% for every $5.00 of added co-pay.
Most plans will have a co-insurance clause. The common ranges are 60/40, 70/30, 80/20, and 90/10. Co-insurance is another way to save on premiums. But be aware that a change in co-insurance may also change your maximum out of pocket. The difference in premiums between a 60/40 plan and a 70/30 plan is about 20%. An 80/20 plan will cost about 35% more. The difference between an 80/20 plan and a 90/10 plan is less than 10%. Since everyone’s situation would be different, your savings may be more or less.
Finally, whether or not you are using a broker, ask about negotiated fees. The answer for a small business maybe “no.” A medium size business may get a reluctant “yes.” If you do not ask, it is almost certain that no one will mention it.
Mitigating Employee Negativity
Every penny you save is increased profit because all savings go directly to your bottom line. However, one thing that you do not want to do is to give your employees the feeling that you are profiting by unequally shifting the burden to them. Bad employee morale is a fast way to destroy productivity and will only hurt your business in the long run.
Increasing deductibles, co-insurance, co-pays and maximum out of pocket costs can certainly be viewed in a poor light by employees. A handful of businesses that I know tackle this problem by offsetting the cost of higher deductibles and co-pays. For example, one business switched at renewal time from a $2500 deductible to a $3000 deductible but planned to reimburse employees for expenses beyond the original $2500. The company saved by going to a higher deductible and accepting future risks. The employees were satisfied with the plan because their share of the costs was reduced while the net effect on them was neutral.
Capping Your Risk
The reason why you will save money by increasing deductibles, co-insurance etc. is that you are reducing the insurance company’s risk. However, you have now accepted that risk. You have accepted that risk whether or not you choose to reimburse your employees. If you choose to reimburse your employees the risk is monetary and there is a remedy for that. If you choose not to reimburse your employees, the risk is to your business and there may not be a satisfactory remedy for that.
To reduce your monetary risks, do what insurance companies have been doing for ages. They reinsure themselves so that any loss they do suffer is capped. If their losses exceed a predetermined amount, another insurance policy reimburses them. You can use the same strategy to reduce your risk.
For example, you decide to reimburse your employees for the extra $1000 of maximum out of pocket costs they incur. You have twenty employees so your maximum liability could potentially total $20,000. That’s more than you are comfortable with. So, you purchase an additional insurance policy that pays you for any costs that total more than you can accept. These policies are usually relatively inexpensive. Just do not try to buy such a policy from the same company that supplies your main health plan. They will probably refuse to sell it to you since it would increase their liability.
Actually, the risk of a large payout is small. Most of the time a deductible is only of concern when you or your employee enters a hospital, needs outpatient surgery or testing. Companies that have used this strategy have found that if they budget for their maximum payout, the account is very likely to have a surplus at the end of the year. After several years the account will no longer require a yearly infusion of cash. If it is in an interest bearing account, it might even generate a small profit.
The trick to saving money on health insurance costs is to gather as much information as possible, then balance each factor in such a manner that the total premium is less than you are paying now. It takes a great deal of effort, but it can be done. But remember, “The only place that success comes before work is in the dictionary.”
Part V of this series deals with the business case for insuring your employees and their families health. As always your comments and criticisms are always welcome. If you want to add to this discussion, email me at rdm@datastats.com.
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