Appeal of Conventional Insurance Plans Fades

Staff Reporter

When it came time a year ago to renew their health insurance with Kaiser Permanente, executives at Matteo LLC, a small downtown Los Angeles manufacturer of luxury linens, had second thoughts.

Tired of fluctuating premiums, Matteo made the leap to a "defined contribution" plan administered by CaliforniaChoice, an Orange County firm. Under the plan, each employee is given about $1,000 to pay for their own health insurance coverage through a choice of seven HMO plans and one PPO plan.

The employees, who pay varying amounts each month to augment the company contribution, grumbled at first. But Matteo is not about to switch back.

"People hate change, but overall I think the employees like it now," said controller Eric Stone, who himself chose a low-cost HMO offered by Universal Care, a local insurer. "We were able to set a fixed cost, and we are not spending as much time dealing with (insurance issues.)"

At a time when percentage increases in health care costs are reaching double digits, Matteo is one of many local companies experimenting with alternatives to traditional health care coverage offered by major insurers.

Among the options: greater use of self insurance, defined contribution programs and "consumer-driven plans," which give employees a certain amount of money to spend directly for medical services.

"There is no question that there is an increase in businesses that are exploring alternatives to what I guess you would call traditional insurance," said Paul Fronstin, director of health research at the Washington D.C.-based Employee Benefit Research Institute. "A handful have made the move, but is there a trend yet? I am not sure."

A few years ago no one was talking much about alternatives. Managed care, after all, was supposed to control health care costs and employers embraced it a decade ago. But with the cost of health care reaching the breaking point, all that's changed.

Consumer-driven plans

One telling indicator came in November when the Pacific Business Group on Health, a coalition of 44 large California health-care purchasers, announced it would offer a consumer-driven plan to members in 2003.

Its so-called Breakthrough Plan is being offered in conjunction with Definity Health, a small three-year-old Minneapolis firm. In fact, the business group took a stake in the company, which has only 25 clients.

"We feel the consumer-driven concept is the next wave in health care," said Clark Miller, a spokesman for the business group. "We feel that large purchasers will embrace it as they did with managed care 10 years ago."

Under the program, employees are set up with a "personal care account" in which employers deposit a sum of money, often $1,000 for individuals and $2,000 for employees with families. The employee then uses the money to directly purchase medical services from a PPO network.

Money not used can be rolled over to the next year to allow the account to build up. However, if the employee has some major medical expense, he or she would have to spend their own money to meet a deductible, which might be set $500 or $1,000 higher. Once the deductible is met, the plan resembles a traditional PPO, with co-payments and the like.

(According to Definity, actuarial data has shown that 70 percent of employees spend less than $1,000 annually on medical expenses.)

Curbing rise in costs

The idea is to provide employees with the freedom they have been seeking and denied through traditional managed care, while at the same time giving them a taste of the "true" cost of health care something that proponents believe could tame the acceleration in health-care costs.

The product itself is priced, on average, between what a traditional HMO and PPO might cost, according to Definity.

"We think that employees will have an incentive to control their health-care costs," said Bill Hanna, a senior vice president at Countrywide Credit Industries, Inc., the Calabasas-based lender, which began offering the Definity plan as an option to its employees this year.

This year, about 5 percent of the lender's 17,000 employees have chosen Definity as their health plan, and the company believes that number will grow as employees pass along their experiences to colleagues.

However, health care analysts say the jury is still out, noting that the spending accounts can be used up in one trip to the ER. Moreover, the complex plans require calculation of costs and use of the Internet to make decisions something not all employees may want or be capable of.

"The average consumer is going to need a lot of education on how to make valid choices," said Dave Lusk, a health-care consultant in Deloitte & Touche's Los Angeles office.

In a sure sign that traditional HMOs are feeling the competition, Health Net Inc. announced late last year it was offering a hybrid PPO that has some similarities to the Definity product: a "first dollar benefit" plan in which 100 percent of each member's yearly expected medical expenses are paid, up to a ceiling, before the deductible kicks in.

However, the Health Net plan is only available to employers with at least 50 employees, while Definity says their plan only works with self insured employers, usually with at least 150 members.

Defined contribution plans

That leaves smaller companies without those options. But according to providers of defined contribution plans, their offerings are filling the slack.

CaliforniaChoice reports that its membership has steadily grown from its 1996 inception to about 11,000 small groups with 150,000 enrollees. And Pacific Health Advantage, the non-profit granddaddy of defined contribution plans for California small business, has seen membership grow to virtually identical numbers.

The two plans both require businesses to contribute at least 50 percent to the cost of their lowest priced plans. For PacAdvantage, that means a single employee in Los Angeles could cost a firm as little as $47 a month, while an employee with a family could cost about $167 a month, with the employee paying an identical amount.

"We allow the employer to make the choice (on the contribution). We just set the minimum standards," said John Grgurina, executive director of PacAdvantage, which is an off-shoot of the Pacific Business Group.

Last December, California Choice recently announced that it was offering through Health Net and Tenet Healthcare Corp. a new bargain-basement HMO option that would cost a single person in Los Angeles as little as $82 month total, not counting an employer's 50 percent or greater contribution. The downside is that the HMO network is very limited, with just 200 physicians and 11 hospitals.

Blue Cross of California just jumped into the defined contribution arena with its FlexScape plan that allows employers to pay flat $80 or $100 contributions to their employees health care coverage. The employees can then choose among a host of Blue Cross plans, depending on what they want to pay out-of-pocket.

"It's like a Chinese menu of health plans," said Michael Chee, a Blue Cross spokesman. "You can do all kinds of combination of offerings."

Fronstin said one pitfall with the defined contribution approach is that it hurts older employees and those with chronic conditions. "If you are young and healthy, $1,000 may buy you a decent policy. If you are older $1,000 is not going to buy anything," he said.

The older worker may spend a small fortune in out of pocket expenses for co-payments for office visits, drugs and other medical procedures, he said.

The major health plans also are seeking to offer cheaper versions of traditional HMOs by such tactics as setting up tiered hospital networks, in which visits to some more expensive hospitals require co-payments, a cost not usually associated with HMOs.

PacifiCare Health Systems Inc. was first out with such a plan last year, but recently Blue Shield of California announced a similar offering and Health Net is expected to soon release details of its plan. The plans have been criticized more as tools to guide patients to hospitals with lower HMO reimbursement rates than as real money savers for employers. And indeed they can cost employees a bundle.

"Consumers want to take charge of their health care, and employers want consumers to be more price aware and make better informed decisions about their health," said Miller, the Pacific Business group spokesman.

The Self-Insured Route

While Southern California employers have seen their health insurance costs skyrocket by as much as 40 percent, a small apparel company is only facing a paltry 1 percent premium increase. That's because Karen Kane Inc., a decades-old manufacturer of contemporary women's clothing, signed up for a self-insurance plan.

"We would hear that our particular claims were really low but other companies' claims were high, which affects the health-care premium costs of everyone," said Lonnie Kane, president of the Vernon-based company named after his wife, a designer. "I started asking myself, 'Why aren't we benefiting from what we do?'"

So Kane and his broker, Stanton Kramer, came up with a program that saved the company $100,000 the first year it was implemented in 1995.

Rather than paying large upfront premiums to insurers, self-insurance plans only pay health-care providers when medical claims come in. Kane's plan has saved the company so much money that last fall vision care was added to the health and dental care package. "We think we have really controlled our health-care costs," said Kane.

A self-insurance plan can be a drain if too many claims are filed. Case in point: Sunkist Growers Inc., in Sherman Oaks, whose plan collapsed late last year, affecting 23,000 employees and 4,800 medical providers. The collapse was blamed on rising physician fees and prescription costs, as well as a software program that underestimated the amount of money needed to make the plan work.

As for the Kanes, their 175 employees are relatively healthy, although there have been two major health catastrophes that have challenged the plan. Both had their health-care costs covered under the self-insurance plan.

The clothing company pays the first $120,000 of a catastrophic claim for each employee, and its insurance company, Great-West Life & Annuity Insurance Co., based in Denver, pays the rest.

The program works this way: Karen Kane Inc. has a separate self-insurance bank account set up to pay its claims. Every Monday, a human resources assistant prints out the previous week's health claims made by the employees. With each week's total, she knows how much money to keep in the account to cover the funds withdrawn by Great-West, which pays the medical claims. The insurance company pays for anything over $120,000 per employee.

To hold down costs, the company tried to get as many employees as possible to enroll in a health maintenance organization program, which is less expensive than a preferred provider organization. Currently, 75 percent of the employees are on the HMO, whose cost is free to employees. Those on the PPO pay $21.75 a month. Employees cover the health-care costs of their dependents.

Each year Kane sits down with his insurance broker to consider what kind of premium increases they might face for the upcoming year. Then they negotiate, haggle, rejigger and look at ways to keep costs down.

For example, they opted to increase its deductible on catastrophic claims, which kept costs down on its premiums and allowed the company to add vision care to its plan. "Honestly for us it has worked great," said Kane. "But let's face it, you're gambling."

Deborah Belgum

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