UNDERSTANDING AND CONTAINING RISING HEALTH-CARE COSTS Roy A. Cook, Fort Lewis College Jeryl L. Nelson, Wayne State College ABSTRACT Providing employee health-care benefits began as an outgrowth of paternalistic gestures by early industrialists and eventually became a common part of many benefit packages in response to governmentally imposed wage controls during World War II. American workers have grown accustomed to receiving healthcare benefits and now consider adequate coverage to be a right rather than a benefit. Although a great deal has been written about providing health-care benefits to private sector employees, there appears to be a void in examining how small businesses are continuing to provide this popular benefit to their employees in a changing environment. This paper helps to fill that void by providing useful information to both academicians and practitioners on the causes and possible solutions to coping with the rising costs of providing health-care services. Cost-Related Issues in Providing Employee Health-Care Benefits Both providers and users of health-care services are being challenged to cope with an upward spiral in health-care costs. Health-care costs continue to rise and are projected to increase by perhaps as much as 20% in 1990 (2). By the end of 1989, the average employer's medical benefit costs had increased to more than 13% of payroll, as compared to 5% of payroll just ten years ago (10). In a survey of more than 1,750 private and public employers with a total work force of 12.5 million, the Princeton, New Jersey, benefits consulting firm, Foster Higgins, found that the average cost to employers of providing health-care benefits increased by 20.4% per employee in 1989 (3). The primary reasons for increasing healthcare costs are an oversupply of hospital beds and facilities' higher labor costs, and the intensity of service including the widening availability of expensive medical technology, the increasing number of AIDs cases, drug treatment programs, an aging population, and surgical transplants of human organs (1; 4; 6). Physicians have also been shown to provide some unnecessary and ineffective medical care in an attempt to avoid malpractice law suits adding to the overall health-care costs (4; 10). Although customarily paying more per employee for their health benefits coverage than larger companies, small companies are still more likely to pay the full cost of health insurance premiums for their employees. A 1987 study by the Small Business Administration found that almost three-fourths of firms with less than 100 employees paid 100% of the employees, health insurance premiums and 87% of family premiums. A 1989 survey of small-and mid-sized northeastern companies revealed that 40% had made no attempts to control health-care costs (10). There are several explanations as to why small companies pay more for insurance coverage than large firms. These include 1) the higher administrative costs per individual for the insurance carrier when working with small numbers; 2) higher costs of medical underwriting; and 3) the inability to self-insure or participate in health-maintenance organizations (HMOs) or preferred-provider organizations (PPOs). Small companies are also less likely to incorporate other cost-savings ideas such as preadmission certification, second opinions, outpatient surgery, concurrent review, discharge planning, and high-cost-case management (10). Legislative Issues in Providing Employee Health-Care Benefits In the last 20 years, almost 800 laws have been passed in the United States, mandating coverage for specific conditions and certain health-care providers. State mandated benefits vary widely, but typically require coverage for psychologists, optometrists, chiropractors, alcoholism-treatment, newborns, the mentally and physically handicapped, and conversion privileges for separated workers. The end result is that these requirements prove to be very costly and are paid only by those companies that 1) are forced to purchase regulated insurance, 2) have adequate financial resources, and/or 3) have the desire to continue to provide coverage for their employees. These same requirements have forced some businesses to either limit or eliminate coverage altogether unless they are large enough to self-insure which exempts them from state mandates as set forth in

the provisions of the Employee Retirement Income Security Act (ERISA) of 1974. Gail Jensen, an economist at Wayne State University, has determined that legislative requirements have been the primary reason 16% of small businesses offer no health benefits coverage. In response to these restrictions, some states are suspending mandated coverage requirements to enable small businesses that currently have no employee insurance to provide low-cost policies (7; 8). Under health-care continuation rules contained in the Consolidated Omnibus Budget Reconciliation Act of 1986, better known as COBRA, employers are required to allow former employees, divorced and widowed spouses of employees, and former dependent children to continue health care at group rates. Employers are also required under COBRA to provide notice of these continuation privileges to separated employees. The provisions under COBRA have been expanded since the initial passage requiring employers to provide coverage for former workers who were excluded from initial coverage due to medical conditions. In addition, the length of time that continuation coverage must be provided has been expanded from 18 to 29 months (9). Potential Solutions to the Problem of Providing Health-Care Benefits Faced with both rising costs and cumbersome legislative requirements, employers are beginning to re-examine healthcare benefit provisions. If health care costs continue to rise as projected, immediate and significant savings could be accomplished through several available cost control approaches. * Increase front-end deductibles to at least $100 and perhaps as high as $500 per employee and/or dependent. * Require employees to pay a portion of their own and/or their dependent's insurance premiums. * Limit the maximum benefit payments available to employees and/or dependents. * Implement or increase employee co-payments for medical services e.g. a 90/10 or possibly an 80/20 split while adding a stop-loss provision to limit an employee's total liability (typically $2,000 or less per employee). * Change insurance carriers in order to obtain more attractive premiums and negotiate for a minimum two-year contract to avoid having premiums raised on an annual basis. * Assume a portion of the risk of providing health-care coverage by self-insuring high cost first dollar payments and contracting for Third Party Administration (TPA) of claims. Caution should be exercised before using any of these alternatives. Due to potential tax and regulatory implications, consult with your accountant and/or legal counsel prior to implementing any changes. Since any of these cost control options would have a noticeable financial impact on the employees due to cost shifting, it is recommended that firms consider providing flexible spending and reimbursement accounts in conjunction with the implementation of any of these alternatives. Flexible spending and reimbursement accounts not only lessen the actual employee costs for out-of-pocket payments but also aid in attempts to educate employees about the true cost of medical services and make them more conscious of these expenditures. Flexible spending or reimbursement accounts were first introduced in 1974, but have been slow to catch on. Flexible spending or reimbursement accounts allow employees to pay for health-care services, deductibles, and co-payments not covered by their employers' plans with pre-tax dollars. Either the employee or both the employee and employer may make contributions to these accounts. Multiple administrative actions which can be classified as "managed care" approaches are also available to small firms in the search for alternative means to control health-care costs. * Require preadmission certification and utilization reviews prior to hospitalization in order to establish medical necessity, appropriate care, and length of hospital stay. * Require second opinions in order to verify the need for elective surgery. * Utilize discharge planning. * Coordinate dependent benefits to encourage dependents, especially working spouses, to seek and use coverage available through their employers. * Require more outpatient care including preadmission testing and surgery. * Provide coverage for home health care or hospice care to avoid the high cost hospitalization. Small businesses located in larger metropolitan areas should also consider more formalized approaches to "managed

care" such as: * Encouraging employees to join Health Maintenance Organizations (HMOs) where available since these organizations are designed to cover an employee's entire medical needs. * Utilizing the services of Preferred Provider Organizations (PPOs) where medical practitioners provide services at a discount. Small businesses should also explore the opportunities of requiring medical underwriting of individuals prior to acceptance in group plans, and joining with similar companies through purchasing groups to obtain pooled insurance coverage. Small firms can join together in Multiple Employer Trusts (METs) either on a local basis or through national and regional associations in order to obtain health-care insurance premiums at costs similar to larger employers. In addition, the potential cost savings available through long-term preventive health-care measures should also be explored. * Employee wellness programs which encourage employees to change unhealthy behaviors, monitor health conditions, and engage in preventive health care can be designed and implemented. * Presentation of employee education programs including information about the costs and effective use of health-care benefits. * Externally administered Employee Assistance Programs (EAPs) designed to assist employees and their dependents in finding help for alcohol, drug, emotional, family, emotional, and other personal problems. Employee Assistance Programs may only be available on a cost-effective basis to companies located in larger metropolitan areas, but any firm can establish effective wellness and education programs. Realizing that new and more restrictive legislation may be enacted and costs may continue to rise, small firms should explore currently available opportunities to reduce their health-care cost burden while providing employees with adequate coverage and financial protection. As decision makers investigate both the costs and problems of providing health-care coverage to all employees, there is a critical need to examine and develop creative solutions. SUMMARY In the face of rising health-care costs new approaches to controlling these costs as well as adequate utilization of presently available cost control techniques must be explored. Since most employees consider health-care coverage to be a right, accurate information about the cost and cost control alternatives of providing these benefits must be communicated in order to develop a greater appreciation of the benefits being provided. REFERENCES (1) Feinberg, Phyllis., "Tightening the lid on health-care costs," Pension World, July 1989, pp. 12-15. (2) Galen, Michele., "Are companies cutting too close to the bone?" Business Week, October 30, 1989, pp. 141, 144. (3) Karr,, Albert R., "Labor letter," Wall Street Journal, January 30, 1990, Section 1, p. 1. (4) Luthans, Fred and Davis, Elaine., "The healthcare cost crisis: causes and containment," Personnel, February 1990, pp. 24-31. (5) Meisenheimer, Joseph R., II, and Wiatrowski, William J., "Flexible benefits plans: Employees who have a choice," Monthly Labor Review, December 1989, pp. 17-23. (6) Miller, Annette; Bradburn, Elizabeth; Hagger, Mary; Robins, Kate; Roberts, Betsy; and Howard, Judy., "Can you afford to get sick?" Newsweek, January 30, 1989, pp. 4451. (7) Monroe, Ark, III., "Paved with you know-what," Nation's Business, February 1990, p. 30. (8) Novack, Janet., "Someone else will pay," Forbes, March 5, 1990, p. 93.

(9) Saddler, Jeanne., "Enterprise: COBRA'S new bite," Wall Street Journal, December 11, 1989, p. B2. (10) Thompson, Roger., "Curbing the high cost of healthcare," Nation's Business, September 1989, pp. 18-29.