Finding creative ways to manage rising health care costs.
By Bridget McCrea
Dan Houk knew his precast firm’s health care costs were inching up, but it wasn’t until three years ago that he realized just how much of a chunk they were taking out of Spokane, Wash.-based Wilbert Precast Inc.’s profits.
With 75 employees on a traditional HMO plan, the company was paying 100 percent of the premiums for those workers – plus their spouses and children. Had he maintained that plan, Houk knew it wouldn’t be long before his firm would be shelling out $1,000 per month per employee, or roughly $900,000 annually.
“We were heading down a pretty expensive road,” says Houk. “It was getting to be way too much.”
Determined not to let health care costs become his company’s largest expense, Houk began searching for viable alternatives that would save the company money and hassle while also keeping its employees healthy and happy. He found the solution in an “innovative benefit” medical and dental insurance package, based on an HRA or Health Reimbursement Account.
Here’s how it works: By using a high ($3,000) deductible insurance, Wilbert Precast saves money on premiums, with extra funds (normally spent on premiums) being placed into an HRA that individual employees use to pay deductibles, co-pays and all other health-related expenses.
Any money not spent for medical costs can be rolled over and allowed to grow. Houk says the firm has intentionally given employees more control over their spending decisions, and has provided them with incentive to save dollars and not “spend them foolishly just because insurance will cover it.” And because unused funds can be rolled over from year to year, employees can bank their dollars for future use.
“Over an employee’s career, it would be reasonable for them to save up tens of thousands of dollars that can be used in the future for health care premiums, supplements, deductibles, vision and dental care,” says Houk.
Wilbert Precast pays 100 percent of the employee’s premium for health and dental insurance, with employees being responsible for spouses and children. Single employees, for example, receive $1,300 per year. Those who are married receive $2,000, while those who are married with children receive $2,600.
According to Houk, a Section 125 flexible benefits portion of the program allows all premiums for other family members to be taken out of the paycheck before taxes. “The employee is not out-of-pocket any more money with this system than they would be in a $300 deductible program, even for someone with health issues that require ongoing expenditures,” says Houk, who calls the program a “win-win” for both employer and employee. “The employee who remains healthy and does not require much from the medical community can pocket up to $2,600 per year that can accumulate until retirement.”
Administration of the new plan is a bit more challenging for employees who, instead of whipping out a card and having their health care paid for, must retain their receipts and turn them in for reimbursement. To make sure employees were comfortable with the switch, Houk used an educational approach, relying on worksheets to explain the program and hourly raises to make up for any out-of-pocket expenses that the employees were being asked to cover.
Three years after implementing the innovative plan, however, Houk says employees are adapting to the new process as the company itself reaps the rewards of less inflationary health care costs for its workforce. “There are still increases, but they’re much smaller, based on the smaller amount of money that the company is paying for health care,” says Houk. “As we go into the future, I see this being a great benefit for the company.”
Just the facts
Companies of all sizes and across all industries are grappling with the fact that health care costs have risen 76 percent since 2000. In fact, health care stands as one of the biggest expenses on any company’s balance sheet, just after payroll and cost of goods sold. Still, it is a necessary expense, for the company that can provide a good health care plan is often the one that attracts the most competent, experienced workers.
“Health care is the number one benefit sought by employees,” says JoAnn Laing, president at Fort Lee, N.J.-based Information Strategies Inc., a marketing and media company serving the health care and small and medium market sectors. Laing applauds the way in which companies like Wilbert Precast have taken the initiative to reduce costs using one of the “consumer directed health care” (CDH) options available on the market today (see the sidebar “Comparison of Consumer Directed Health Care Plans”).
“In manufacturing, pennies count,” Laing says. “A CDH premium can save a company one-third on health care premiums, thus enhancing profitability.”
Steven Smith, vice president of the benefits department at Meadowbrook Insurance in Southfield, Mich., says the fact that health care costs have been spiraling upward over the past few years makes it especially tough for a manufacturer to wrap its arms around the problem. For what might be a good option one day can quickly turn into a money pit the next. “We’re still seeing 8 to 12 percent increases annually,” says Smith, “and there’s no end in sight.”
To deal with the issue, Laing says manufacturers can do like Wilbert Precast did and look at CDH options that closely involve employees in the management of their own health and expenses related to it. Take the HSA or health savings account, for example. When combined with a high-deductible, traditional health insurance plan, HSAs can help small business owners cover most of the health care bases. Open to those who have a high deductible health insurance plan ($1,000 for individuals or $2,000 for families), HSAs feature monthly tax deductible contributions that in 2004 were capped at either the high deductible of $2,600 for individuals and $5,150 for families, whichever amount is less.
HSA funds can be used to cover the health insurance deductible and any co-payments for medical services, prescriptions or products. They can also be used to pay for over-the-counter drugs and long-term care insurance, and to pay health insurance premiums during any period of unemployment. Any money left at the end of the payout period belongs to the individual who put it there, and can either be withdrawn or rolled over to the next year.
Understand, however, that the HSA shouldn’t be treated as a stand-alone solution but rather as an adjunct to a traditional, high-deductible plan. Such plans, which are less expensive than their lower-deductible counterparts, can serve as a safety net should a medical problem occur that the HSA isn’t equipped to handle.
“People are highly vulnerable to a major illness, accident or injury,” explains Nan Andrews Amish, president of Big Picture Health care, an El Granada, Calif.-based management and health care consultancy. “If all someone has is an HSA, he or she will use up that HSA very fast. Few people have $10,000 or $20,000 sitting in an account to pay for care.”
Exploring your options
The health care environment in the United States may be daunting for manufacturers right now, but there are a few other alternatives out there to consider. Grace-Marie Turner, president of the Galen Institute, an Alexandria, Va.-based organization that serves as a think tank for free-market health care reform, points to small business purchasing pool options (offered in some states) as one choice.
In such instances, a number of smaller firms would be able to “pool” their health care needs and premiums to act as a group and even buy health care coverage across state lines. “This would allow the companies to shop around for lower rates,” says Turner, who adds that the Galen Institute is supporting the idea, which has yet to come to fruition.
The Galen Institute also favors associate health plans, which allow business owners to purchase insurance through trade and industry groups (some of which already offer such coverage) via a pooled program. “Small businesses should shop around with different associations to seek out better rates than they could get on their own,” says Turner.
Jim Stults, vice president of group sales for American Community Mutual Insurance Co. in Livonia, Mich., concurs. He says companies seeking more “buying power” should approach those organizations that they support and inquire about health insurance coverage. In return, expect lower premiums based on that increased buying power.
And much like consumers who use Web sites to search for products, precasters can research a variety of health plans online through sites like eHealthInsurance.com (www.ehealthinsurance.com). These and other sites work with a number of insurers who will review your information and offer up health insurance quotes on a variety of plans.
Ultimately, Ted Carlson says that hiring healthy employees and then promoting ongoing health in the workforce will go a long way toward reducing the costs of health care. “There’s a correlation between low-cost health insurance and healthy employees, so anything you can do to promote health is going to pay a benefit,” says Carlson, president at Houston-based Carlson Consulting, which provides objective advice on the design and administration of employee benefit plans. “It also carries the message that you care about your employees and that you want to protect them in the same way that you would care for the machinery used to manufacture your products.”