Are you ready for some new strategies to control the cost of your group health insurance? Something more than simply getting more quotes, before your next renewal? You do have some other options. Some are extreme measures, but what would you do to save 20 to 25% of what you are paying now for group health insurance?

In this article, we will describe some of the options that could be available to you, and you can decide what might suit your practice.   Not all of these cost-control techniques are available in all plans, or for all sizes of groups, but there are enough techniques out there that you should be able to find a good fit for your practice.

First - the no-brainer — If you do not already have a Section 125 Flexible Spending Account (FSA) that allows employees to pay their share of health insurance premiums with pre-tax dollars, establish that account now. With an FSA, the employer provides payroll deduction, and the administration of reimbursing employees’ expenses, but incurs no other cost at all. This is a very inexpensive benefit for an employer to implement.  Meanwhile, every dollar an employee pays for medical expenses is worth a whole dollar — not a dollar that has been taxed. If you choose, you can expand the FSA to include certain expenses outside of the benefit program including out of pocket medical expense and monies paid for day care.  If you want to reduce what your employees must pay for their health coverage in real dollars, there is no reason not to have an FSA.

Second, the “high-low” — If you have only a PPO option now, at your next renewal add an HMO option, in which rates typically are 20% lower.   Then, let employees know that you will base your own share of costs on the HMO option. Employees remaining in the more flexible PPO will have to pay more out of pocket than before. Many employees will take the HMO option to reduce their own costs.  Further, decide now how much of a dollar increase you are willing to absorb at the following year’s renewal, and tell employees the amount now. That way, you can budget for the next year, and your employees are on notice that their own costs might increase.

Third, “Getting tough on drugs” — Prescription drugs are the biggest culprit in the inflation of health-care costs. Most health care plans have employee co-payment requirements for drugs. (A recent Hay Group report put the average at $10 for generic drugs, $20 for formulary brand-name drugs, and $30 for non-formulary brand-name drugs.) However, most plans do not include a drug deductible. Check into having either mid-term or at renewal a deductible; for example, $50-$150 per employee per year. Your employees who have prescriptions will not like it, but the reality is that employees who do not use prescription drugs are subsidizing those who do. Having a deductible does not eliminate that subsidy, but it does reduce it.  As the employer, you need to evaluate what shifting is fair, for your own organization. Once you are persuaded, you have a chance to persuade your employees. At that point, it becomes a matter of good communication. Surveys show a strong correlation between employee satisfaction with benefits and the quality of communication about those benefits.

You also can impose an annual cap on prescription drugs; e.g., $3,000 to $5,000 per employee, and save perhaps 5% a year on your overall program costs. Think it through before you take this step, however.  Is there anyone in the organization who is spending several thousand dollars a year for prescriptions? If so, you might forego this option.

Does your group health plan have a co-pay for hospital admissions? Most don’t, but you can choose to have one — perhaps $300 to $500 per visit, and save 1-2% a year on your overall plan costs. Typically, this change is done at renewal, but some plans will allow it mid-term. This is a good example of a benefit “reduction” that will have zero effect on most of your employees.

Increasing your employees’ co-pays can be offset through a variety of first-dollar, supplemental benefit programs.  Before going farther, let’s consider the potential savings for an organization that presently offers a PPO only, and has no prescription deductible, and no hospital co-pays, and pays $30,000 a year (employer’s share) for group health coverage. There are 30 employees participating in the plan.

•           Adding an HMO option, and basing employer contribution on HMO Savings: 15-20%
•           Establishing $100 deductible for prescription drugs — Savings: 3-5%
•           Establishing hospital co-pay requirement — Savings: 1-2%

TOTAL SAVINGS: 19-27%, or $5,700 to $8,100 on a $30,000 expense annually

Now, on to other measures, some extreme and some not...

The high deductible — Are you willing to consider imposing a deductible of $1,000 or more for single coverage, and $2,000 for family coverage? It is draconian, particularly for your lower-paid employees, but it can reduce your group health costs 15-20%, compared to a PPO.

There are ways to mitigate the impact on your lower-paid employees.  is to offer a voluntary “hospital indemnity” plan. Employees who choose to pay the relatively inexpensive premiums via payroll deduction would not be charged for a hospital visit involving any of several critical illnesses listed by the plan. Another way is to increase your own contribution for lower-paid employees. For your higher-paid employees who are being asked to increase out-of-pocket costs, you can consider offering some selective, “nonqualified” benefits such as key person insurance, or group “carve-out” programs for life and disability.  These are just a few examples of ways you can add back benefits when you have taken some away, and still come out ahead on cost.

Also, consider linking your high-deductible plan with a new Health Savings Account, which Congress authorized effective January 1, 2004.  Employees may contribute the entire amount of their deductible to their HSA account. (Employers also may contribute.) Those contributions are deductible for the current tax year, interest in the account grows tax-deferred, and all withdrawals for eligible medical expenses are tax-free. Unused amounts can be rolled over year-to-year, for an indefinite time.  Employers still may provide first-dollar or low-deductible coverage for certain preventive services, without violating the definition of a high-deductible plan. The IRS recently issued guidance in this area, and is expected to issue additional guidance.

The insure-it-yourself plan — If you have more than 50 employees, you should seriously consider partial self-insurance for your group health plan. This involves creating one’s own plan design, paying claims through a third-party administrator who is paid on a fee basis, and purchasing reinsurance to cap the organization’s liability both for specific claims and for aggregated claims.  No client that has made the change has ever chosen to go back to a fully-insured plan. All were able to reduce their costs.

The Health Reimbursement Account - Not to be confused with the Health Savings Account described above, this type of account allows most employers to reduce their cost of benefits by $40 to $75 per employee per month. Health Reimbursement Accounts and/or Qualified Benefit Savings Accounts require no change of benefit plans or providers. Taking advantage of various sections of the IRS code and subsequent IRS revenue rulings, these plans involve changing direct employer contributions to an arrangement by which employees are reimbursed for their expenses with pre-tax dollars. Employers experience a net reduction in their share of benefit costs, and reduced FICA taxes. Employees enjoy a small increase in take-home pay that is nontaxable, with no loss of benefits. There are no up-front costs, and no enrollment process.

The bare bones — There are group health plans costing less than $100 per employee per month that cover basic doctor visits and hospital admissions. The employer pays the entire cost, except for co-pays, usually in the area of $20-50 per visit. Although primarily intended for part-time employees, they also can be purchased for full-time employees. The benefits are limited, but would take care of a few earaches and a broken arm or two, each year.

Nails in the road — With health care costs in the stratosphere, employers might be tempted to change their benefit programs if a substantial savings is offered, without fully considering possible disadvantages.  It is important to compare not just rates, premiums and provider networks, but also the terms and conditions of each plan. Different definitions of “usual and customary” charges, and different provider fee schedules, can skew the comparison of two plans where out-of-network reimbursement is concerned. Certain benefits might be capped in one plan but not another; some procedures might be excluded in one plan but not another; and deductibles or co-payments for certain procedures might not count toward out-of-pocket limits under one plan but would count under another. Also, rates are quoted assuming the group has no major health problems. After the questionnaires are in, the quote can be “rated up” if such problems are disclosed. In comparing plans, you need to know how much the quotes might be “rated up” (50% is not uncommon.)

Recently, a new problem has arisen. Employers in our area are being approached by representatives of “association” insurance plans that promise to reduce costs dramatically through the combined purchasing power of homogeneous customer organizations. However, as one of the largest writers of health insurance in the Washington and Baltimore area, CIMA’s experience is very clear on this point  — insurance companies have been, and continue to be, absolutely unwilling to underwrite such programs. Neither the promised program nor the promised cost savings will materialize.

Lawrence S. Simon, CPA is Co-Chair of our Healthcare Services Group and has over twenty-five years of experience serving the healthcare industry. Larry can be reached at lsimon@marg.com.