Trends in Employee Benefits

By Jeffrey Coulter

Vice President

DODGE, WARREN & PETERS

INSURANCE SERVICES

One of the most difficult and time consuming jobs performed by Human Resource professionals is the design and implementation of employee benefit programs. These programs can represent a significant percentage of a corporation's annual budget, and the prospect for confusion in the marketplace is quite high. Traditionally, employers have opted to provide benefits in order to attract and retain competent employees. In addition, a properly constructed employee benefit program can promote increased productivity and efficiency.

The term "Employee Benefits" can best be defined as those company sponsored plans made available to employees in addition to salary. The employee benefit most commonly made available is employer sponsored medical insurance. Other benefits include group dental, vision, term life, and disability insurance. Some employers provide ancillary coverages such as employee assistance programs and pre-paid legal programs. Employee contributions for such plans can be deducted on a pre-tax basis through Section 125 of the Internal Revenue Code.

Human Resource and payroll professionals are also charged with the duty of complying with new regulations such as COBRA and HIPAA.

In the interest of brevity, we will focus on group health insurance trends. The health insurance market has been volatile over the course of the last year for a number of reasons. An unprecedented wave of industry consolidation has resulted in record mergers and the elimination of alternative markets. Within the last three years, the California market has seen Health Net merge with Foundation, FHP with Pacificare. and most recently, CareAmerica with Blue Shield. This trend is not limited to the large HMOs. Aetna recently acquired New York Life's NYLCARE unit and is currently working on concluding an agreement to acquire Prudential's health insurance business. These mergers are driven in part by the desire of the companies involved to improve efficiency, reduce costs and increase market share. Of course, the goal of increasing market share can be achieved more quickly by acquiring existing business than by creating new business.

Rates will continue to increase for many reasons. Many carriers have engaged

in a virtual price war for members over the last two years. In the pursuit of these

members, programs were installed at rates that could not support costs. Two years ago it was possible for an employer to purchase an HMO program at a rate of $80 per employee per month; the same plan now would cost $12- $15 more per employee per month. Some of these carriers were so successful at writing undervalued business that they have found it difficult to provide quality care due to the influx of these new members. Kaiser, for example, has been forced to send members to outside facilities for (oftentimes quite expensive) care. Kaiser's spokesperson recently alluded to this situation while discussing the company's performance over the last quarter. They have indicated that they will need to continue to raise rates to meet these unexpected costs. Over the last year, Kaiser's rates have increased by 10 12% from the year previous. Projections for 8% this year may be optimistic. Kaiser is not alone.

Other carriers have toughened prescription formularies in order to control spiraling pharmaceutical costs. For example, many CareAmerica HMO customers had no formulary restrictions. Now, as Blue Shield members, prescriptions must be chosen from a previously published list of approved medications. These medications are purchased in volume and at discount. Most HMO's have instituted similar formulary prescription policies. The impact of new FDA policies regarding the approval of experimental medications can be limited through the formulary process.

Physician Groups and hospitals are pressuring carriers for higher reimbursement and capitation rates and terminating unprofitable contracts. While some carriers have responded by loosening referral restrictions and adding "open" directories, others have tightened restrictions on access to specialists.

Continuing advancements in medical research and technology will add to costs. Life expectancy continues to rise, which is compounded by the sheer number of graying baby boomers.

In 1992, Bill Clinton was elected president in part because he promised to overhaul the nation's health care delivery system. While the administration and Congress have made gains by eliminating pre-existing illness restrictions and by ensuring for portability of coverage, comprehensive reform has stalled on the federal level. This could change as the talk in Washington moves to Medicare reform.

More significantly, with the election of Gray Davis as Governor, reform is on the way at the state level. A number of measures, which previously passed the legislature but were vetoed by Gov. Wilson have been reintroduced. Gov. Davis has indicated that many of these measures had met with his approval. It is likely that certain measures are pre-determined. For example, it is highly unlikely that the Department of Corporations will retain jurisdiction over HMO's. The Dept. has been under heavy criticism for lax supervision and enforcement of HMOs. In any event, additional mandates and taxes are likely to increase pressure to raise premiums.

These pressures have led to an improvement in the climate for alternative funding mechanisms. Prior to the advent of the large HMO's, major American corporations could be counted on to participate in a risk-sharing arrangement with insurers whereby the corporation could design a custom employee benefits plan and "self-insure" a limited portion of the claims in return for lower costs. Whether the policy was issued as an "Administrative Services Only " (ASO) contract, in which losses were totally self insured, or as a "Minimum Premium Policy" (MPP), in which risk is shared by the employer and the insurer, the employer was able to realize the benefit of reduced administrative and retention charges.

By instituting a proactive claims management policy, the employer benefits by reducing claim costs. In addition, the employer has the ability to design a program which features those options most desirable to them. For example, an employer can elect the option of offering "open" directory Exclusive Provider Organizations and Preferred Provider Organizations to its employees. Alternative funding is competitively available to employer groups over 100 employees.

In summary, we believe that 1999 will be a volatile year in the health insurance industry. We expect continuing industry consolidation as carriers look for every competitive advantage. Rates can be expected to increase by a minimum of 5%, with some renewals at much higher figures.

Business owners can not afford to be complacent about their employee benefit plans. It is a good idea to begin reviewing your employee benefit plan 3 to 4 months prior to renewal. This allows the time for a strict analysis of the company's needs and budget.

Jeffrey Coulter is a Vice President of DODGE, WARREN & PETERS INSURANCE SERVICES, INC. specializing in Employee Benefits. He can be reached at (310) 542-4370, ext. 267.

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