Help Employees Understand Health Insurance Premium Increases

"With the slow economy and three consecutive years of double-digit health insurance premium increases cutting into firms' bottom lines, employers are moving more aggressively to shift more health costs to workers." (Source: Lesser)

The cost of health insurance is skyrocketing and increasingly employers are asking employees to pay a larger share of the cost for their health care. Historically, employers have sheltered employees from these cost increases. "Because lack of information breeds lack of control, many [employees] are frustrated by a situation they don't fully understand. Some become angry with their employer." (Source: MCHP) In fact, a recent poll found that "more Americans are worried about health care costs than losing their job, paying their rent or mortgage, losing money in the stock market, or being a victim of a terrorist attack." (Source: Kaiser) Unfortunately, experts predict that health insurance premiums will rise another 50 percent by 2006. (Source: Simmons)

It usually falls on the shoulders of the HR professional to communicate the bad news of higher health insurance premiums to employees (see sample newsletter article.) People often find the news easier to accept when they understand the underlying causes of health insurance price hikes. Also, people feel empowered when they have options to lower the amount they pay for health insurance.

I. Why is Health Insurance Becoming So Expensive?

The simple answer is that health insurance is expensive because health care is expensive. In truth, many factors impact the cost of health insurance. Specific factors driving rising health care costs include: (Source: AAHP)

• Less competition among health insurance companies
• Higher compensation for hospitals and medical groups;
• High cost technology and drugs;
• Changing demographics of the commercially insured population
• Government mandates.

During the 1990s there was intense competition for health insurance companies and HMOs to increase their share of the market. The competition drove health insurance premiums down and many employers saw rates decrease in the late 1990s. The fierce competition also caused insurance companies to acquire competitors. During the mid to late 1990s, for example, Blue Shield of California acquired CareAmerica, Pacificare acquired Foundation Health Systems, and Aetna acquired Prudential's health insurance business. Additionally, in 2001 the State Department of Managed Health Care took control of Maxicare and Tower Health, both of which ceased operation. The few remaining health insurance companies now seek profitable business rather than more members. Consequently, employers have few options when their health plan contracts renew and their premiums increase.

During the 1990's doctors formed medical groups to obtain HMO contracts. "During the height of managed care, providers were willing to share risk with health plans…In numerous cases, providers lost money or went bankrupt because they inappropriately allocated the cost of the risk they assumed. Now, most hospitals are refusing risk contracts, instead opting for per-diems or variations of fee-for-service." (Source: AAHP) Many medical groups closed and those that survived, merged. Hospitals reduced beds and drastically cut costs. Many hospitals merged into associations or became for-profit (e.g., Tenant Hospitals.) Now, some hospitals refuse to participate in carrier networks. Another new phenomenon is hospitals advertising their "centers of excellence," to encourage patients to remain loyal to the hospital, without regard to a particular insurance company. Consequently, providers are able to obtain higher compensation and insurance companies pass these higher costs on to employers.

Sophisticated technologies, such as the MRI, help doctors accurately diagnose illness. Revolutionary devices, such as arterial shunts and balloons, help avoid invasive surgery. Miracle drugs reduce cholesterol, relieve allergies, improve health, save lives and keep people out of the hospital. These advances are costly. Not only are they costly, but, in the case of prescription medicine, pharmaceutical companies increase the demand for their medication by advertising directly to consumers. To show the power of these direct-to-consumer (DTC) ads, "one study asked patients what they would do if a doctor refused to prescribe a drug that the patient wanted as a result of a DTC ad. One-fourth of patients said they would seek a prescription elsewhere and 15% said they would consider terminating their relationship with their physician." Further, "(DTC) advertising has more than tripled in dollar volume from $791 million in 1996 to $2.5 billion in 2000 and doctors and patients demand these drugs." (Source: Wolfe) Demand for wonder drugs adds to the cost of health insurance.

Baby Boomers are aging and demanding more medical services. "As Americans age into their 40s, 50s and beyond, they consume more medical resources. The biggest surge in Baby Boomers is currently between the ages of 55 and 59…Baby Boomers who used few health care services for two decades are turning to physicians, hospitals, and other providers with increasing regularity." (Source: AAHP)

Federal and state governments require that health plans include certain benefits. A few examples of these mandates include: health plans paying for the treatment of specific mental illnesses as they would any other illness; health plans paying for a woman to stay a minimum number of days in the hospital following the delivery of a child; and, hospitals staffing a specific ratio of nurses to patients. All would agree that these are important components of health care. However, they cost money and they add to the price of health insurance.

HIPAA, the Health Insurance Portability & Accountability Act of 1996, is an example of a good, but costly, government mandate. HIPAA requires that insurance companies and medical providers protect the privacy of medical information. The protection of medical information is a laudable goal. However, the administrative time and legal fees associated with HIPAA compliance add to the cost of health insurance. Consider that the cost of simply mailing HIPAA compliance notifications to the roughly 10 million commercially insured people in California adds $3.7 million (for postage alone) to the cost of health insurance.

II. Help Employees Explore Options to Reduce Costs

As companies increasingly ask employees to pay more for company sponsored health insurance, employees will demand lower cost alternatives. New group health insurance plan designs with high deductibles, partially funded by employers, are on the horizon. These "Health Reimbursement Account" plans promise to reduce health insurance expenditures.

Alternatively, employees can purchase individual health insurance instead of participating in their company's health plan. Many employers pay only a fraction, if any, of the health insurance premium for dependents. Therefore, individual health insurance may be particularly attractive for dependent coverage (i.e., spouse and / or children.) It is important to note that insurance companies often decline to offer coverage to people with pre-existing medical conditions. So, an individual policy may not be an option for all employees or dependents.

Employees seek advice on medical insurance plans from HR professionals. Unfortunately, HR professionals have little time and often find health insurance difficult to explain. To become effective consumers, employees need to understand health insurance (see side box "Health Insurance 101.") Websites, such as BenefitsCafe.com, help people compare individual health insurance plan benefits, provider networks and monthly premiums. Here, individuals can research the health insurance market on their own, saving HR professionals time.

The high cost of health insurance demands that employers and employees work together to find affordable solutions. Communication and education enhance this joint effort.

Get a California small group health insurance quote.

1) C.S. Lesser, P.B. Ginsburg, Health Care Cost and Access Problems Intensify: Initial Findings From HSC's Recent Site Visits, Issue Brief No. 63, May 2003, Center for Studying Health System Change

2) Council of Health Plans, The Rising Costs of MN Health Care, November 2002

3) Henry J. Kaiser Family Foundation, "Health Care Worriers in Context with Other Worries," Kaiser Health Poll Report, March/April 2003.

4) "The Coalition projects that the average annual premium for employer-sponsored family health coverage will surge to $14,545 in 2006. This figure is more than double the average premium in 2001 and is more than $5,000 higher than this year's (2003) estimated average of $9,160." H. Simmons, M.D.,et al., Charting the Cost of Inaction, May 19, 2003, National Coalition on Health Care.

5) The Factors Fueling Rising Healthcare Costs, April 2002, PriceWaterhouseCoopers, American Association of Health Plans, and, B.C. Strunk, P.B. Ginsburg, Tracking Health Care Costs: Trends Stabilize But Remain High in 2002, Health Tracking Market Watch, June 11, 2003.

6) The Factors Fueling Rising Healthcare Costs, p.6.

7) Testimony of Sidney M. Wolfe, MD, Director, Public Citizen's Health Research Group, before the Subcommittee on Consumer Affairs Hearing, Senate Commerce Committee on Direct-to-Consumer (DTC) Advertising, July 24, 2001.

8) The Factors Fueling Rising Healthcare Costs, p.7.

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