Insurance touches the lives of all U.S. citizens, yet is still a fairly mysterious financial instrument even for the most sophisticated business leaders. To better understand the behavior of this insurance one must blend a mix of economics and social science to arrive at common sense explanations for what is happening and why.
“There are very meaningful financial impacts felt by those who purchase health insurance, and those impacts are largely caused by politics,” says Sergio Bechara, president and CEO of Millennium Corporate Solutions.
As an insurance broker, Bechara is well-positioned to understand the plight of health insurance companies and employers alike.
Smart Business spoke with Bechara about the ramifications of President Obama’s health care plan on the health insurance industry and how it will affect employers.
Why are health insurance costs rising?
Ask yourself what you would do if you owned a health insurance company facing a legislative tsunami known as ‘Obamacare’ with two potential financial threats looming.
1) The government might compete against you. However, because the government, unlike your other competitors, can print money when it needs more, you might be competing against a better capitalized opponent.
2) You might be forced to take on risks you did not calculate for as a condition of doing business. This is a very big deal.
How can the addition of new risks pose a financial threat to insurance companies?
How many banks failed in the last four years? More than 350. By contrast, how many insurance companies have failed? Only one.
Insurance companies have a major investment in actuarial analytics to help determine their risk and, therefore, their future pricing. They measure a large assortment of data such as cost of care, likelihood of disease, probability of use resulting from accidents, etc. These companies have years and years of data to improve their accuracy of assumptions leading to their pricing. However, the wild card with zero data to analyze is the complete unpredictability that ‘Obamacare’ might have on their business.
It creates a potentially tremendous unknown that has to go into their tried-and-true formula. There are no data points telling them how to predict their future cost, because nobody really knows how much it is going to cost.
So are insurance companies adapting, and what is the impact to employers?
As a smart businessperson, what would you do? Lowering rates in an uncertain economy never happens. Essentially, you have two choices: Begin to build a ‘war chest’ to protect yourself against the future unknown or continue business as usual and simply meet tomorrow’s challenges when tomorrow comes. This was, of course, a rhetorical question, but one that has a serious ripple effect because every dollar that goes into a war chest is one dollar that goes out of circulation from our economy.
Now how many other industries, companies, sole proprietorships are reacting the same way with their capital for the similar core reason: an uncertain economy? When capital exits circulation, the economy slows.
There is no greater or lesser wealth or money on this planet today than there was in 2007. As a visual example, if one were to look at Earth from space, and take ‘before’ and ‘after’ photographs, it would look the same in 2007 as it does today. There were no aliens that came to Earth and left with the planet’s wealth in 2008.
The flow of capital is the life’s blood of any business and any economy.
When capital flows like a river, businesses thrive like reeds on the river banks, when capital flows like oozing lava businesses suffer from atrophy — it is that simple. All the dollars and financial resources that were on this planet in 2007 have not left the planet. They have just stopped flowing through our economic streams. This is either because of dams being built or streams being redirected to foreign countries or reservoirs.
How will employers be affected and how will they react?
They are going to have increased costs and increased overhead. Employers have three choices of how to handle the increases coming from the health insurance sector. They can pass them along to employees by asking them to participate more in their own health insurance through company plans, or the company can absorb the increase and try to pass it along to its customers. There is one other choice: avoid an increase in cost by decreasing benefits.
What is the outlook for the future, and how will our economic climate affect that outlook?
‘Jobs, jobs, jobs.’ This has been the battle cry from all corners of the nation and from all walks of life. However, for a job to exist or be created, an employer or a business of some kind must exist. That business will have shareholders and/or owners. That business must have a need followed by a willingness to hire. That having been said, let’s take a look at our climate:
1) Banks lending with considerable more restraint to not lending at all
2) Threat of higher taxes and of ‘unknown’ amounts
3) In California, new regulations giving employees more rights to unionize or threaten to increase the cost of doing business in an already suppressed economy leaving little room to pass along increases
4) Regulatory enforcement from various agencies, especially the Occupational Safety and Health Administration, becoming more present that ever. In fact, in our firm of insurance brokering and risk management, defending clients from O.S.H.A. has been the fastest growing part of our practice.
Sergio Bechara is president and CEO of Millennium Corporate Solutions. Reach him at (949) 679-7120 or firstname.lastname@example.org.
HR professionals haven’t seen a need to revise their company’s health care strategy. After all, they’ve been busy with staff reductions and taking steps to offset rising health care costs, while waiting for a government committee to clarify the murky details of health care reform.
But it’s time to stop procrastinating and get back to the drawing board, because employer health care costs are projected to rise by 7 percent in 2012 and insurance carriers are reporting an increase in employee claims for illnesses related to post-recession stress.
“It’s easy to avoid change in times of uncertainty, but at some point it only puts you further behind,” says Bruce Davis, principal and national practice leader for Health & Group Benefits at Findley Davies. “Employers should continue introducing purposeful changes to their health care plan within the context of a clearly conceived strategy.”
Smart Business spoke with Davis about the latest health care trends and how employers are using the information to make plan changes and update their current strategy.
Is cost shifting the new reality?
Surveys show that companies will continue shifting costs onto employees, who are already stressed because they’re working longer hours and haven’t received a substantial raise since the start of the recession. So this is the perfect time to revisit your basic contribution philosophy. For example, it might make sense to shift costs for dependents and part-time workers instead of reducing the health care subsidy for full-time employees. If you communicate a new pricing structure and reinforce the eligibility requirements before open enrollment begins, employees may voluntarily lower costs by removing ineligible dependents or transitioning to a less expensive plan. If your plan costs are still too high, consider conducting a dependent audit or changing the spousal requirements, because you may be able to avoid additional cost shifting.
Is wellness really the solution to rising costs?
Employees receiving short-term disability benefits may be responsible for more than 50 percent of an employer’s health claims. Furthermore, new studies indicate obese workers have greater incidence of workers compensation claims and a longer/more expensive duration of treatment.
Also, working long hours while caring for an aging relative creates so much stress that employees often use the Federal Medical Leave Act to take time off and are less productive when they finally return to work. Savvy employers are starting to understand the connection between work-related absences, family issues, depression and disability claims, so they’re taking a holistic approach to wellness by bundling health incentives with workplace safety programs. They’re also offering stress-reducing benefits like EAP and elder care resources in an attempt to control the entire spectrum of health-related costs.
Will employers continue migrating toward high deductible health plans and HSAs?
High deductible plans and HSAs are not a magic bullet for rising health care costs. In fact, data show that education and market-driven plan changes may yield similar results. One company with a zero deductible plan substantially lowered its costs by educating employees and helping them become smarter health care consumers. Generic drugs already accounted for 40 percent to 50 percent of this company’s filled prescriptions, but teaching employees to request less costly alternatives from physicians and pharmacists increased generics to 70 percent. Employees have a vested interest in maintaining their coverage, so don’t underestimate their desire or ability to help the company save money.
How are employers handling health care reform?
While some employers have been reluctant to change their current plans and forgo grandfathered status, because they would have to comply with additional requirements, other HR professionals have been concerned about the excise tax on ‘Cadillac plans,’ so they have been tweaking their plans to stay below that tax threshold. They’re initiating changes to control costs, like adjusting co-pays on prescription drugs, changing contribution levels and encouraging employees to proactively manage their health by offering incentives to complete a risk assessment.
How should employers approach this year’s open enrollment period?
Many are using this year’s open enrollment period to educate employees, scrub ineligible members from the program and introduce outcome-based incentives. Several of our clients are using inducements to increase participation in programs that help employees manage chronic conditions, as the majority of health care claims emanate from illnesses like diabetes and hypertension. The use of onsite medical clinics is also increasing, especially for employee assessments and health care screenings. These clinics have been successful because fewer families have a regular physician and employees are more inclined to proactively manage their health when they have convenient access to a doctor.
What else can employers do to manage health care costs in this era of uncertainty?
Employers are leveraging their purchasing power to lower costs by joining prescription drug collaboratives and purchasing groups. They’re also excluding certain pharmacies to improve overall ingredient cost discounts and eliminating coverage for expensive brands that have generic or over-the-counter alternatives. In addition, employers are re-considering the use of more narrow networks of hospitals and physicians to optimize discounts while preserving quality and access. Also, the competitive market for life and disability coverage has let companies request bids and apply the savings to health care. Overall, it’s not a time for rash decisions, but there’s never been a better time to institute small changes and revisit your health care strategy.
Bruce Davis is a principal and national practice leader for Health & Group Benefits at Findley Davies. Reach him at (419) 327-4133 or email@example.com.
Much attention has been paid to the American Health Benefit Exchange, the facet of the Affordable Care Act (ACA) designed to help individuals who do not have employer-provided insurance.
The ACA also requires states to utilize Small business Health Options Program (SHOP Exchange). Each state is required to set up these exchanges by Jan. 1, 2014.
“Both the state of Georgia and Georgia businesses will face challenges when it comes to meeting requirements set forth in the ACA, or health care reform law,” says Albert Ertel, COO of Alliant Health Plans.
Smart Business spoke with Ertel about how health care reform is changing how your company purchases health insurance.
How can SHOP exchanges help small businesses with health care costs?
The whole idea of health care reform is to reduce the number of uninsureds by lowering costs. But the law is not addressing the cost of care. It is attacking the cost of insurance, and adding hopefully lower-cost alternatives.
The goal of these exchanges is to create a well-functioning marketplace providing an array of affordable, high-quality health insurance plans for small businesses and their employees.
States can combine individual and small business exchanges — an option with many proponents, because expanding the pool would mean more competition among insurers, which leads to more choice and should result in better pricing for consumers.
Also, companies that purchase insurance through the approved exchanges may be eligible for a sizable health insurance tax credit. The credit is based on an employer’s number of employees and average payroll. If the average payroll is less than $25,000, the employer receives 100 percent of the premium through the tax credit. It declines proportionally as average payroll increases to $50,000, at which point the credit is no longer available.
How will small businesses determine whether they’re eligible to participate in an exchange?
Currently, Georgia law defines ‘small businesses’ as two to 50 employees for insurance purposes. The federal law indicates eligibility is up to 100 employees. This leads to two important questions: Will single entrepreneurs become eligible? And what will Georgia decide?
What issues will the state of Georgia run into when implementing exchanges?
Numerous decisions will have to be made. First, whether the exchange is going to be public, private or a combination — the state of Georgia is working through that now.
There are questions about whether the SHOP exchange, single or multiple, will end up competing with individual exchanges. Also, there will be competition outside of the exchanges. For small business health insurance, price is king.
Additional considerations include a regional approach to the exchange, dividing Georgia into regions, similar to the approach used to enhance competition for Medicaid plans. Or another option is joining states to form a ‘compact.’ Adding multiple states to an exchange is a double-edged sword. With that expansion, you may eliminate competition by turning it over to the big players in those states, because they are already there.
What can states do to help exchanges be successful?
They have to understand what their constituencies are: small and medium-sized businesses. They must decide if they are going to do it on a defined contribution basis, and whether they are going to set up an active or passive exchange. Competition should rule, and my bet is that Georgia will choose a ‘passive’ approach. Most involved in the current committees do not want to add more levels of bureaucracy, which is something they would have to do with an ‘active’ exchange. The state would have to set up a separate committee to approve not only the carriers, but also the plan designs.
One of the keys to the success of the exchange will be the technology that is needed. If the exchange is going to be charged with approving and monitoring whether individuals qualify for the tax credit, there has to be successful transfer of qualifying data sets and information provided by the employer to the exchange. An example is payroll through the IRS. Ensuring qualification may need to occur as often as quarterly, or will be an annual process, so there will have to be an active link to the IRS, Department of Labor, HHS and several state agencies. There are many issues yet to be defined.
What are some potential problems ahead?
Health care reform expands the definition of eligibility for Medicaid. With the increased definition, Georgia may add up to an additional 850,000 to Medicaid. That’s going to be very costly.
Also, as long as it is an employer-sponsored plan, health insurance is deductible as a business expense, allowing employers to continue to provide the insurance. Also, the current system allows employee payroll deductions to be done on a pre-tax basis. That option will be lost in the individual exchange, because individual insurance is purchased with post-tax dollars.
That whole system could be up in the air, because Congress has talked about an option to reduce the deficit, which is to eliminate the tax deduction for employer-based health insurance. You talk about blowing up a system — with unintended consequences. With no incentive for employers to provide insurance, the number of uninsured goes through the roof. If you give the individuals the choice without serious penalties, many would take the ‘insurance’ dollars and fend for themselves. The result is the loss of a significant amount of people in the insurance pool, which hurts these exchanges, because insurance relies on a large pool of covered lives to be successful. I agree changes are needed, but an exchange may be unnecessary when we already have one — it’s called ‘the market.’
Albert Ertel is COO of Alliant Health Plans. Reach him at (706) 629-8848 or firstname.lastname@example.org.
Not even Dave Blom can predict where exactly the health care reform will leave his industry. But he does know that OhioHealth, the umbrella of not-for-profit, faith-based hospitals and health care organizations where he’s president, will survive the changes if “they” unite as “we.”
OhioHealth’s new branding campaign reflects this cohesiveness with the idea that, “WE are more than a health system. WE are a belief system,” as it says on the website. Blom needs a true team, not just a collection of more than 40 care sites, to innovate and improve the quality of care that OhioHealth provides. So he leads OhioHealth on a pursuit of “systemness” — building teamwork and applying best practices with the common vision of improving the convenience and quality of health care for all members of the community, regardless of their ability to pay.
Because of this, Smart Business, U.S. Bank and Blue Technologies named Blom to the 2011 class of Columbus Smart Leader honorees. He shared how OhioHealth overcomes the changes in health care with cohesiveness and curiosity.
Give us an example of a business challenge you and/or your organization faced, as well as how you overcame it.
It is no secret that health care is undergoing major change and has been for some time. We also know with health care reform, the changes are going to intensify. But no one really knows exactly how or to what degree — there is still a large degree of uncertainty. What we do know is that we have to change how we deliver care. We have to learn to do more with less while always delivering value. Most importantly, at all times, we must maintain and improve quality, access and service.
OhioHealth has been on a ‘systemness’ journey for a few years now, and it has really intensified in the last couple of years, given the changing health care landscape. We are our community’s leading provider of health care, and it is our responsibility to ensure we are positioned to meet our mission in the future. The challenge we faced is that the more than 40 care sites under the OhioHealth umbrella have largely functioned independently in the past. That approach just won’t cut it as health care changes.
Today, we are not only deploying best practices across our organization; we are looking at all processes throughout our organization. It goes even deeper — it’s about a culture shift. We’re asking our associates and physicians to think differently about what they do and how we can do it better together, and they are making it happen. Today, we have more than 35 teams with hundreds of associates and physicians working on projects that will strengthen both our organization and how we deliver care.
It is a work in progress, but we are making great strides. The organization has achieved quality and service levels worthy of national recognition and a workplace culture noted by Fortune magazine as a best place to work, while lowering costs and achieving efficiency levels that will position the organization for the inevitable pressures of a changing health care industry.
The strategy has created cohesiveness, as exemplified by our new branding campaign: Believe in WE. It represents how we are committed to working together to do what’s best for our patients. And that is in partnership with our patients and the community; they are a part of WE.
In what ways are you an innovative leader, and how does your organization employ innovation to be on the leading edge?
At the heart of innovation is a healthy sense of curiosity. It is important to give people an outlet to explore how their ideas can be translated and applied in a meaningful way, especially in an organization comprised of caregivers who already have a natural instinct to improve the lives of others.
In 2006, we introduced the OhioHealth Research and Innovation Institute. OHRI offers an array of services to support clinicians in conducting investigational research studies that could eventually impact the standard of care for our patients. Whether it is a medical breakthrough, a new procedure or a medical device, OHRI supports the process of taking innovative ideas that have the potential to improve the delivery of health care from concept and research to commercialization.
In fact, new medical products developed by OhioHealth clinicians and first introduced at OhioHealth’s hospitals are now marketed internationally.
How do you make a significant impact on the community and regional economy?
OhioHealth’s most significant impact is on the health of our community. Our facilities and services are spread out geographically so we are available when and where patients need health care.
That takes 21,000 associates, physicians and volunteers who not only work in and around Columbus; they also live here and take pride in their communities. That is a powerful force in the economic health of central Ohio.
As a not-for-profit health care system, every dollar OhioHealth earns is reinvested in our community to improve quality of care, increase access to care and enhance service to patients and their families. One of the most tangible measures of that investment is the amount of community benefit we provide each year.
In 2010, OhioHealth provided $191 million in community benefit, exceeding the amount of taxes we would have paid if we were a for-profit business. More than $80 million of that was charity care for members of our community who are uninsured and lack the ability to pay for care.
How to reach: OhioHealth, www.ohiohealth.com
See all 2011 Columbus Smart Leaders on the next page.
Together with U.S. Bank and Blue Technologies, Smart Business named the following honorees to the 2011 class of Columbus Smart Leaders:
- Christine Poon, Dean, Fisher College of Business at The Ohio State University
- Dave Blom, President, OhioHealth
- Denny Griffith, President, Columbus College of Art & Design
- Derrick Clay, Vice President, New Visions
- Doug Kridler, President, Columbus Foundation
- Jack Partridge, President, Columbia Gas
- Marjory Pizzuti, President and CEO, Goodwill Columbus
- Brenda Stier-Anstine, CEO, Marketing Works
- Jim Klein, CEO, Finance Fund
- Kevin Gadd, CEO, Venture Highway
- Eleanor Alvarez, President, LeaderStat
- *TaKeysha Sheppard Cheney, CEO, The Women’s Book
- Brigadier General Arnold W. Bunch Jr., Air Force Security Assistance Center at Wright-Patterson Air Force Base
*Indicates Women Presidents’ Organization Breakthrough Business Leader
The major components of health care reform don’t go into effect until 2014, but that doesn’t mean that you can wait until then to act.
If you don’t begin planning now for how the changes will impact your company, you could find yourself in trouble, says Steve Freeman, president of USI in San Francisco.
“There are going to be specific requirements and mandates,” says Freeman. “You need to start the process today. Have a plan, know what your core values are on offering benefits to your employees and know where you want to be versus your competition on compensation and benefits. Make sure your plan is in compliance for what you need to be doing now, and make sure you’re going to be ready for 2014.”
Smart Business spoke with Freeman about how to prepare for the coming changes.
What changes have already been implemented?
Effective Sept. 23, 2010: plans can no longer have lifetime limitations on essential benefits or unreasonable annual limits on essential benefits. Also, employers have to provide coverage for employees’ children up to age 26. There are no rescissions on coverage and insurance companies can’t impose any pre-existing conditions exclusions for individuals under the age of 19. And as of Jan. 1, 2011, flexible spending accounts can no longer be used to pay for over-the-counter drugs without a prescription.
What changes have impacted employers that cover part-time or seasonal workers?
Many employers with seasonal or part-time employees offer limited medical plans, providing a fixed amount of medical benefits, typically up to an annual maximum of $15,000 to $25,000. Under the new rules, health care reform prohibits imposing annual limits.
For plans beginning after Sept. 23, 2010, to Sept. 23, 2011, the maximum on limited medical plans increases to $750,000. After Sept. 23, 2012, that goes to $1.25 million, and in 2013, it increases to $2 million, making those plans cost prohibitive to employers and employees.
However, the government has allowed employers to file for waivers that restrict the annual limit at the same level. If the Department of Health and Human Services determines that compliance would result in loss of access to benefits, or a significant increase in costs to those covered, it will grant the waiver.
Can plans be grandfathered in under the old rules?
If you don’t make any changes to your benefit plan, it is considered grandfathered. If you make any significant changes in regard to deductibles, coinsurance or employee contributions, you lose your status. And because costs continue to rise, most employers will have to change their plans.
Once you lose your grandfathered status with your health plan, you have additional requirements in the benefits you offer, which include preventive service at 100 percent. In addition, if you have a fully insured plan, you can no longer discriminate in favor of highly compensated individuals. There are also other patient protections in regard to primary care physicians, OB/GYN access and emergency services.
What changes are coming in 2014?
The most significant is that employers will be mandated to provide health care coverage if they have more than 50 employees. If they don’t provide health care coverage, there is a penalty of $2,000 a year, per employee, in excess of 30 employees. Now, most employer groups pay an average of $8,500 to $10,000 per year, per employee. If an employer can pay $10,000 a year for coverage or $2,000 in a penalty, it may choose the penalty.
Employers of choice will continue to offer benefits to attract and retain employees, but in a recent survey by McKinney & Co., 30 percent of employers said they will definitely or probably stop offering employer-sponsored health plans after 2014.
Individuals will also be mandated to have health insurance, but, again, the penalties are not significant. In 2014, it is $95, or 1 percent of one’s taxable income. In 2015, that increases to $325, or 2 percent of taxable income and, in 2016, that goes to $695, or 2.5 percent of taxable income.
What should employers be doing now to prepare for 2014?
Many owners are so busy running their businesses that they’re not thinking about how this is going to impact their business and their employees. But you need to look at your existing program now to make sure you’re in compliance with the parts of health care reform that have already been implemented.
Second, develop a strategy for the next two to three years on where you want to position your benefits as a percentage of total payroll. Develop that benchmark of where you want to be, what you want to pay and where you want to be positioned versus your competition.
If you’re not paying attention now, you have two-and-a-half years to the day of reckoning, and you need to be aware that your competition is probably thinking about it. How is your competition going to be positioned to attract and retain good employees? If the competition is going to offer benefits, what are those, versus forcing employees to buy through an exchange?
Businesses need to act now, as failing to address the impact this will have on your company will put you at a distinct disadvantage come 2014.
Steve Freeman is president of USI San Francisco. Reach him at (925) 472-6772 or email@example.com.
Federally mandated reforms have only made the system more confusing. Now, more than ever, you need someone on your side to help you make sense of the mess.
“If your health care consultant doesn’t understand how the system works, then you’re forced to become an expert in health care when you should be focusing on your core business,” says Frank L. Marrone, senior vice president and partner with Millennium Corporate Solutions. “There are qualified insurance advisers out there; investigate, interview and then engage with one that fits your needs.”
Smart Business spoke with Marrone about how a skilled consultant can help you navigate the confusing aspects of the health care system during health care reform and any other time you need a trusted adviser.
How is the health care and insurance system changing?
In our country, health care is a trillion-dollar industry that is driven by Wall Street. Wall Street and medicine are opposite forces. I’m not saying that one is good and one is evil; they just work in different directions. Wall Street exists for profitability. Executives of insurance companies keep their jobs by being profitable.
The health care system is a triangle consisting of the patient, the doctor and the insurance company. When the two most significant players are pulling in opposite directions with the patient in the middle, you have a broken system.
Employers, employees, family members — all patients — need to be able to make sound decisions with what we know to be true. Costs are not coming down, services are being stretched and the realities of health reform are only going to mean increased costs for the currently insured, while offering greater and more timely access to the uninsured or underinsured.
There is good and bad in almost everything. The good in health reform is going to cost a lot more than anyone knows.
Why are costs out of control and how can they be fixed?
The key element to health care reform and pricing is that the delivery system has not figured out a way to compensate doctors for keeping us healthy. Today, there is no incentive for a physician to have healthy patients because the physician will most likely go out of business.
Another reason costs are out of control is litigation. Everyone pays for medical malpractice claims; doctor premiums are passed on to all consumers. In fact, as medical products get priced, it’s necessary to factor in the cost of medical malpractice.
What can consumers do to survive in today’s health care system?
For example, A PPO rate for a family may be $2,300 per month, or $27,600 per year, just to have medical insurance — to prevent the risk of huge personal costs if they get sick. Who can afford that? And, how long can it be afforded?
The one thing consumers can do is ask themselves these questions: Do you exercise regularly? Do you consciously plan a healthy lifestyle? Do you eat proper food? We, as a nation, need to get healthy. If you are an overweight smoker with high cholesterol and hypertension and you want to eat a burrito at midnight, you are more likely to increase your chances of a heart attack.
First Lady Michelle Obama is promoting wellness and fighting child obesity on television, but I’m not sure people understand that getting healthy is a long-term process. Everyone wants to see immediate results, but patience is necessary. Just like no one gains 10 pounds in a week, no one loses 10 pounds in a week.
How can a health insurance broker or consultant help companies navigate the system?
You need someone on your side who understands how the system works. You cannot negotiate simply by telling an insurance company, ‘Give me a better price.’ You have to bring facts to support your claims.
The role of a good broker or consultant is to gather information from insurance companies and use that information to battle for his or her clients. At end of the day, insurance carriers will work cooperatively with good data and research — they want to make the best decisions too, so a good consultant will help develop that story.
For instance, if I let insurance companies know my client has had a good year, I will show them the utilization statistics to support my claim. If the carrier wants to charge my client a higher premium to compensate for other companies that have had a bad year, I will tell the carrier to get that increase from someone else — not from my client.
Frank L. Marrone is a senior vice president and partner with Millennium Corporate Solutions. Reach him at (818) 844-4120 or firstname.lastname@example.org.
Have you ever wondered exactly how insurance companies determine the premium you pay? It’s a complicated process; many factors are taken into account.
Health insurance premiums paid by businesses are as much a human resources issue as a financial issue, says Albert Ertel, COO of Alliant Health Plans. “It’s a decision requiring balance. You have to determine if the benefits that HR wants to provide fit the budget,” he says.
Smart Business spoke with Ertel about how insurance companies determine your premium and how health care reform may affect the price you pay.
What do insurance companies look for when determining a premium?
The insurance company is looking for sufficient premiums to pay for estimated claims during the upcoming policy year. It is an educated estimate, using a simple formula that requires very complicated input. Underwriting and pricing is as much an art as it is a science. Insurance companies try to use past claims history as a predictor of the future. The goal is to develop a premium rate to cover future medical expenses and administrative costs.
Whether it is health, homeowner’s or auto insurance, there are two pieces of any premium dollar: the cost of doing business (administrative costs) and claims paid. The difference is that health insurance companies process a lot of claims — many low cost, high volume and others very low utilization but very high cost. ‘Normal’ utilization can be predicted for most groups. A small percentage of individuals will generate 70 percent to 80 percent of medical claims. Will those be one time or ongoing?
Why are premiums trending upward at the moment?
Premiums have outpaced wages for a number of years. Recently, the government has weighed in with a new law that may only exacerbate the increases. The Patient Protection Act has mandated new benefits, which focus on prevention and wellness. These benefits have to be paid for by the insurance companies at 100 percent with no cost sharing.
A few insurance carriers have been using health care reform as a reason to increase premiums, whether warranted or not. The real reason is fear of the unknown. Note, insurance pays for eligible treatments and nothing is holding down medical cost increases, yet.
What are the steps in the premium determination process?
First, the insurance company analyses the prior two to three years of claims and compares it to covered lives. Then they apply medical trend, which takes into consideration medical inflation, technology improvements, utilization, new treatments and drugs.
Second, they see where the group is located and compare this to available care in that region and adjust accordingly. For example, if new services become available in an area it will affect cost of coverage. New technology is expensive and needs to be paid for; supply and demand economics does not work in health care, as greater supply leads to greater utilization and costs. One of the variables when predicting premiums, or predicting medical costs, may be a new ‘miracle drug’ a patient just has to have. Or the local hospital bought a new CT scanner and it will be utilized.
What other factors go into pricing?
The size of the company, its industry and the age, sex and health status of eligible individuals, where they are located and the plan of benefits chosen are all considered. Lifestyles tend to be different between workers in varying industries. Those differences could include education, recreational activities, nutrition, and smoking and drinking habits. The age and sex of the people within the group has a lot of influence in the numbers. Young males tend to be healthier, young females are risk adjusted for potential maternity claims. Geography comes into play and may be coincidental to industry. Northwest Georgia is the ‘Carpet Capital’ of the world and jobs tend to be in a factory. That area has a high percentage of smokers. Also, consider the higher cost of healthy food. Atlanta has a much higher concentration of ‘white-collar’ jobs. Education levels may be higher and health awareness is commonplace.
Location also comes into play when considering available services. Availability of specialty services and referral patterns has to be considered when pricing health coverages. Known health concerns within a ‘group’ can have a significant impact on premium rates. An insurance carrier must price any risk to cover known claims; current cancer treatment, end stage renal disease or uncontrolled diabetes with multiple complications are conditions that could impact premiums. Finally, the benefits are considered; deductibles, co-pays and out of pockets affect required premiums.
Does anything else impact pricing?
Administrative costs will be added to the potential cost of claims. Those costs include customer service, underwriting, sales, claims processing, printing, postage, Internet and website maintenance, agent commissions and taxes. These costs cover the insurance company’s overhead or cost of doing business. These are generally lower than one would expect. Overall general and administrative costs run around 14 percent to 20 percent depending on the size of the covered group.
What can companies expect in the future?
Costs will continue to rise until we all make a stand; we need to improve our lifestyle choices today. Companies and insurers alike should be pushing employee awareness to improve prevention, wellness and personal responsibility. It’s fairly easy — less care equals less cost. And insurance should be there for the unexpected illness or injury.
Albert Ertel is COO of Alliant Health Plans. Reach him at (706) 629-8848 or email@example.com.
Upcoming health care reforms will require employers to monitor and report so much information that staying compliant will require a lot of time and effort.
“There are already many laws and rules that exist today affecting employers who offer health insurance benefits to their employees. The Patient Protection and Affordable Care Act, popularly referred to as the health care reform law, will impose many more responsibilities, including many new reporting requirements,” says Alicia Saporito, partner, Millennium Corporate Solutions. “That’s why it is so important to partner with a broker or consultant that not only understands how your business is affected by the health care reform law but also how to use existing technology to help you stay on top of the rules and minimize your liability for failure to comply with many of the thousands of laws you are required to follow today and in the future.”
Smart Business spoke with Saporito about how technology can make compliance easier.
What do businesses need to know about new initiatives and requirements?
The new initiative is going to require that companies track and document much more information than they ever had to in the past. In addition, employers will have to report much more information about their health plan to the federal government. For example, employers must document it when they offer medical insurance to qualified dependents up to age 26 and that the employee had a full 30 days to make the election. Employers must also provide notice to employees that lifetime limits under medical insurance plans are no longer legal. Employers will have to provide a uniform explanation of coverage to their employees and they will have to provide notice to the employee 60 days in advance of any change in the benefit plan. A new reporting requirement will mandate that all employers report the value of the employee benefits on the W-2 of each employee. Noncompliant employers would be subject to hefty fines.
How can technology assist employers in complying with existing rules and requirements?
COBRA requires that employers provide timely notice to eligible participants of their rights and contains many important notices and timelines. HIPAA requires health plans offered by employers to document certain business processes and rules. This law also requires you to provide information about benefits availability to eligible participants of the plan on a uniform basis.
Technology can help you provide historical proof that you offered benefits to eligible participants and document the reasons employees waived their right to participate under the health and welfare benefit plan. A good system will track all transactions and approvals and show a timestamp to provide an audit trail. You can track COBRA notices and prove how quickly required notices were issued. By using an automated system, employees will be notified well within the guidelines and this will minimize employer liability for failure to provide timely and accurate notices.
Using a technology tool will ensure that benefits deductions are fed to payroll correctly. When done manually, incorrect deductions may be sent to payroll and, instead of taking advantage of having their employees help pay for the cost of insurance, employers are then paying the full cost or, in some cases, overpaying the incorrect cost.
How can leveraging technology increase efficiency in the administration of benefit plans?
Employers are responsible for timely and accurate reporting of new enrollments and terminations to their benefit plan administrators or insurance companies. If there is a delay when an employee becomes eligible for coverage and is actually added into the insurance company’s system, this could present a challenge not only to the employee but also the company’s HR department. If the employee experiences an urgent need to see a provider or in obtaining a required medication, the HR department will spend a lot of time helping the employee receive the medical attention they need while they wait for coverage verification from the insurance company. Even worse, from a risk management standpoint, if HR forgets to send the paperwork on a timely basis the insurance company can deny coverage altogether. The employer may be liable for the coverage promised to the employee. There is another employer liability if a deduction is taken from the employee’s pay while there was no coverage in place.
Employers who rely on manual reporting of changes in coverage to the insurance company may end up overpaying for their benefit plans. For example, if a company terminates someone’s employment, it has to terminate the coverage on a timely basis to avoid paying unnecessary premium for that individual. When you streamline the process by making it automatic with an electronic component, it makes it a lot more foolproof.
Where should an employer start with the compliance and technology evaluation process?
Employers should begin by performing an audit of their current practices and business process as they relate to the health and welfare benefit plans and evaluate them against the requirements set forth by state and federal law. Also, review all the information provided to employees. There should be practices in place to track and document all of this.
It is important to correct any deficiencies before they are discovered either by an employee complaint or through a Department of Labor audit. The federal government uses random audits to ensure that employers are complying with their various obligations under their health and welfare benefit plans. It’s important for employers to demonstrate they have the required documentation, systems and tools in place and that the information is stored in a secure manner as to protect the information as required under existing laws. A good employee benefit broker/consultant who is familiar with the laws as well as the technology available to employers to assist with compliance is a valuable resource.
Alicia Saporito is a partner and senior vice president in the Employee Benefit Plan Risk Management division of Millennium Corporate Solutions. Reach her at (949) 679-7117 or firstname.lastname@example.org.
Health and welfare compliance requirements have increased considerably over the last several years and continue to grow in number due to new provisions from health care reform.
Even employers who have been diligent about complying with new issues as they have arisen are finding it overwhelming to track the accumulation of these requirements, says Jeff Morgan, executive vice president of USI’s San Francisco office.
“Even employers devoting significant resources to staying on top of this are having difficulty getting their arms around it,” he says.
Smart Business spoke with Morgan about how employers can keep plans compliant.
Why this onslaught of new compliance tasks?
It would be easy to blame health care reform for the additional reporting requirements, but this is nothing new. Over the last several years, new notice requirements for Medicare D, CHIPRA, and the Newborns and Mothers Health Protection Act, to name a few, have been accumulating. When you add the San Francisco Health Care Ordinance (SFHCO), HIPAA and the Patient Protection and Affordable Care Act (health care reform) to this equation, the result is a daunting project for even experienced human resources staffs.
How can employers begin to bring their plans into compliance?
We often find that employers have added new requirements to their routine on an ad hoc basis and that when a broader review is performed, some items have been overlooked, or the employer was not aware of a specific requirement. They should perform a full review based on a long list of criteria. This will catch the new requirements from health care reform, as well as older requirements from COBRA, HIPAA and ERISA.
In which particular areas are employers overlooking requirements of the law?
There are three areas to which employers should be paying particular attention: HIPAA privacy and security rules, discrimination rules under health care reform and the funding requirements of the San Francisco Health Care Ordinance.
For employers that self-fund their benefits or otherwise handle protected health information regarding plan participants, the requirements under HIPAA to build an infrastructure to protect that information can be formidable. Without guidance, many employers may neglect what is prescribed by regulation.
Health care reform places new requirements on insured plans to not discriminate in favor of highly compensated employees. This includes not only differences in benefits but also in employer contributions toward benefits. Executive perquisites in benefits need to become a thing of the past in order to comply. Self-funded plans always had nondiscrimination rules, and these are unchanged.
SFHCO requires employers to fund at specified levels for the benefit of any qualified employees. Many employers do not clearly understand these requirements or fund correctly for them.
What about older, more established regulatory requirements such as COBRA and ERISA?
Most employers would benefit from checking their plans to make sure that these basic requirements have been attended to properly.
In the case of ERISA, one of the most common problems is one of the oldest — the establishment of proper plan documents and summary plan descriptions. Any insured plans still rely on policies and certificates of coverage from their insurers to serve as the ERISA plan documents, when this is most often not sufficient to satisfy the regulations. Specific language and disclosures are required by law for all such documents, and the carrier documents often do not include such language. ‘Wrap documents’ may convert insurance contracts into ERISA documents, but many employers still have not taken proper measures to make sure this has been accomplished.
Often, employers will assume that an outside COBRA administrator will take care of everything. But, even if an employer has outsourced COBRA administration to a professional firm, the employer still has ultimate responsibility for execution of these tasks.
Further, even major national COBRA administration firms sometimes do nothing to cover the requirements of COBRA-like regulations sponsored by states. One example is Minnesota’s requirement for continuation of group life insurance benefits. Many COBRA administrators do not tend to this requirement, or requirements like it, leaving employers with the responsibility of sending required notifications, as well as collection of premiums and reporting to insurers. And employers are often unaware of such requirements.
Are there more obscure requirements that are frequently passed over?
Many employers with employee populations in San Francisco established HRAs to hold the required funding for the SFHCO. This is an approved method of funding the benefit; however, it may run afoul of health care reform, which requires specific annual limits for benefits in general. Freestanding HRAs are subject to these requirements and are not excluded like FSAs and HSAs.
Regulators have advised that such plans need a formal waiver from the annual limits requirements to remain in compliance with health care reform. Special application must be made to Health and Human Services in order to gain such a waiver.
What are the penalties for failing to meet these compliance requirements?
With governments seeking revenue wherever they can find it, we see enforcement efforts and potential fines as becoming more prevalent. In a worst-case scenario, noncompliance can bring the loss of a plan’s tax-favored status, both for employer contributions and for those of employees. Other penalties vary by rule, but, for example, the new health care reform discrimination rules carry a penalty of $100 per employee per day, which can become very expensive, very quickly.
Jeff Morgan is executive vice president of USI. Reach him at email@example.com.
Even though a federal judge in Florida ruled in late January that Health Care Reform is unconstitutional, don't expect any changes in the immediate future. Until and unless the U.S. Supreme Court invalidates the law, you can expect that federal and state governments will continue to implement it.
U.S. District Judge Roger Vinson ruled that the Patient Protection and Affordable Care Act of 2010 is unconstitutional because it requires nearly all Americans to purchase health insurance by 2014 or face higher taxes. He said the failure to purchase health insurance is "inactivity," which Congress does not have the authority to regulate. However, Judge Vinson refused the plaintiffs' request to suspend the law. So Obama Administration officials have said the federal government and individual states should proceed without interruption to set up insurance exchanges and lay the framework for other sections of the law.
Justice Department officials have already commented that they will immediately appeal the decision to the 11th Circuit Court of Appeals. Given the conflicting court decisions on the issue, it is unlikely that the constitutionality of the law will be definitively resolved until it is brought before and decided by the U.S. Supreme Court in the next few years.
Nondiscrimination Rules Delayed
Some employers breathed a huge sigh of relief; for others the news came too late. The IRS announced in late December that the nondiscrimination rules for insured health plans, a feature of the Health Care Reform law, will be delayed until regulations are issued and plan sponsors have time to implement necessary changes. The nondiscrimination rules were originally scheduled to take effect beginning the first plan year on or after September 23, 2010. The date was January 1, 2011, for calendar year plans.
By way of background, under Health Care Reform, insured group health plans (other than "grandfathered" plans) may not discriminate with respect to eligibility or benefits in favor of highly compensated individuals -- generally the top-paid 25 percent of a company's employees. This presumably means that highly compensated employees cannot have better benefits, lower premium contributions or a shorter waiting period for coverage than employees who are not highly compensated. It would also appear to preclude post-employment health insurance or severance arrangements only for executives or other highly paid former employees. Previously, nondiscrimination rules applied to self-insured health plans but not to insured plans.
While the rules for insured health plans are supposed to be similar to those that apply to self-insured plans, the sanctions are quite different. For an insured plan, the potential penalty is $100 per individual for each day the violation continues. So if a plan with 500 participants provides discriminatory benefits to the top three executives, the potential penalty is $100 a day for each of the other 497 employees. Compare this to the penalty for a discriminatory self-insured plan, which is loss of tax benefits for the highly compensated individuals who benefited from the discrimination.
Because of the potentially draconian penalties, many sponsors of insured health plans scrambled to remain "grandfathered" under the Health Care Reform law or changed their health plans to comply with the new requirements. Some refrained from increasing employee contributions and cost-sharing for 2011 in order to remain "grandfathered," others completely redesigned their offerings.
The IRS issued Notice 2011-1 delaying the application of nondiscrimination rules just days before the compliance deadline for calendar year plans. Unfortunately this last-minute notice came too late for those who had already made costly plan changes.
Plan sponsors should be aware that the delay applies only to insured health plans. Self-insured health plans (including HRAs) and cafeteria plans (including FSAs) continue to be subject to nondiscrimination requirements.
The Department of Labor's recent "Frequently Asked Questions – Part V" (FAQs) provide news concerning the effective dates of two other Health Care Reform requirements -- automatic health plan enrollment and the 60-day advance notice of health plan changes. Automatic Enrollment: The Health Care Reform law requires employers with more than 200 full-time employees to automatically enroll new employees in their health plans and to continue the enrollment of current employees from year to year unless they opt out (similar to 401(k) automatic enrollment). While the law appeared to make this requirement effective immediately upon enactment, the new FAQs confirm that employers are not required to comply until the DOL issues regulations on how automatic enrollment will work. Furthermore, the DOL does not intend to complete this rulemaking until 2014.
60-Day Notice: Likewise, the new law requires group health plans to give enrollees at least 60 days' prior notice of any material modification to their health plan coverage, but there was some confusion on when this goes into effect. The FAQs indicate compliance will not be required until such time as health plans must provide enrollees with a summary of benefits and coverage. This summary does not need to be provided until March 23, 2012 (24 months after Health Care Reform was enacted), and is subject to future standards from federal agencies.
This sponsored article is brought to you by Warner Norcross & Judd LLP.