Lynchburg, VA-based McFeely’s Square Drive Screws is typical of most smaller catalog companies. Its owner/president, Jim Ray, is grappling with spiraling health insurance costs. During the past 12 months, the cataloger’s health insurance premiums increased 27%, to $255 per employee a month.
McFeely’s, which employs about 35 workers, has about 25 employees on its plan. The company can afford only to cover employees — it doesn’t extend coverage to their spouses or children. If McFeely’s paid health insurance costs for the employees’ spouses and children, it would have to shell out $766 per employee a month.
“We’ve changed the plan slightly,” says Ray, whose provider is Anthem/Blue Cross Blue Shield. “That 27% increase was certainly hard to swallow.” The cataloger doubled the deductible that employees must pay, to $1,000. It also raised the co-pay from $25 a doctor’s visit to $50. In the process, McFeely’s insurance premiums fell to $201 a month per employee.
Ray’s not happy about having had to put more of the burden on his workers. But he likes the alternative even less. “There’s not much you can do other than eliminate benefits,” Ray says.
And doing so would make it harder for McFeely’s to retain and attract quality workers. “You want to be competitive in the process, but the health insurance plays a definite role in attracting people,” Ray notes.
A drain on expenses
Health insurance costs “make each new hire an investment,” says Margot Murphy Moore of Richford, VT-based wellness products cataloger 1-800-Homeopathy. She estimates that each employee’s insurance package costs her nearly one-third as much as the worker’s salary. And every year, insurance adds up incrementally on the profit/loss statement, she says. Right now, insurance comprises 1.9% of 1-800-Homeopathy’s expenses. “You can’t ignore 1.9%,” Moore says.
Another fact you can’t ignore: According to Menlo Park, CA-based healthcare research consultancy Kaiser Family Foundation, premiums for employer-sponsored health insurance rose 11% this year — the fourth consecutive year of double-digit growth.
Mark Kelsey, president of Healthinsurance.com, a firm that helps companies decide which medical plans to use, says the aging population is to blame for the steady growth in premiums. “A high percent of health insurance claims come in the last years of one’s life. And right now we don’t have the youth in our system to cover the higher costs,” he explains. “The older population represent 10% of the insured pool, but their insurance claims against policies represent nearly 50% of all the claims….[so] you have to raise claims on everyone to cover these increases in population.”
Seeking relief
Catalogers who have been hit with years of double-digit increases, such as Chris Bradley, president of Portland, ME-based bedding cataloger Cuddledown of Maine, are less concerned with the cause of the increasing premiums than with finding relief from them. “They raise your overall costs and limit your profitability. They lower the money that you have for other things,” Bradley says. “But we’re not willing to cut benefits.”
Cuddledown of Maine’s plan is an HMO from Cigna in which the cataloger pays 55% of the employee’s premium. To contain costs Cuddledown has tried everything from raising its deductible to shopping around for another plan.
Bradley is also looking into having the New England Mail Order Association (NEMOA), the Portland, ME-based trade group of which he is president, offer group health insurance to members. If enough NEMOA members participated, “it would represent real savings” for them, he says. But if the pool gets hit with a few high claims, Bradley adds, “everyone else is left holding the bag.” More to the point, Bradley has found that few insurance carriers even write plans for associations.
The consumer-driven model
Consumer-driven health plans are one option that more companies are considering, says Sam DeLois, who runs Methuen, MA-based consultancy Infinity Benefit Services. These typically combine a health insurance policy that carries a high deductible with a Health Savings Account (HSA), a tax-advantaged, employee-managed medical account that covers some or all of the deductible. (See “HSAs at a Glance,” below.)
Say the employer opts for a policy with a $2,500 deductible. The company might then give each employee $1,500 for his HSA account to help meet the deductible. The employees can spend the funds on anything from eyeglasses to extended hospital visits. For employees who visit doctors infrequently, the $1,500 from the company can pay the employee’s deductible. Any money left in the HSA at the end of the year generally rolls over to the next year, an incentive for employees to spend prudently. And if employees spend less, the premiums charged by the insurance carriers should begin to come down.
According to the Kaiser Family Foundation, 500,000 employees were covered by consumer-driven plans last year, up from 100,000 in 2002, but still a small percentage of the 175 million Americans who have some kind of health insurance. Kaiser says 90% of insured employees use $1,000 or less in allowable expenses.
Critics of consumer-driven plans say that they put an unfair burden on families hit by frequent or unexpected illnesses. But proponents, such as DeLois, believe that these plans may begin to stem the increasing costs of healthcare. Companies using consumer-driven plans, he says, have cut their healthcare costs as much as 10%.
Section 125
An HSA can be a part of a Section 125 plan, which derives its name from Internal Revenue Code Section 125. This type of plan allows companies to give their employees the opportunity to pay for benefits on a pretax basis. Pretax benefits lower payroll-related taxes for both the employer and the employee. Unused employee contributions are forfeited and revert to the employer to offset administrative costs or are given back to participants on a per-capita basis.
The Section 125 plan offers several alternatives. Among the most common are cafeteria plans, premium-only plans, and flexible spending plans. A cafeteria plan gives employers the opportunity to gain control over their benefit expenditures by offering a menu of benefits. Instead of an established set of benefits (such as a medical plan and $50,000 worth of life insurance), a cafeteria plan allocates to each employee a set sum of “benefit dollars.” The employees then choose which combination of benefits, from those on the employer-selected menu, on which to spend their allocation.
Although the employer can allocate to each worker the same amount of benefit dollars as it would spend on more-traditional insurance coverage, cafeteria plans end up being more expensive to implement because of their complexity. That said, employers ultimately save money through the more efficient plan design.
Premium-only plans are the most basic type of Section 125 alternative. Employees can pay for benefits on a pretax basis, thus lowering their taxable income and their tax liability.
With flexible spending accounts, employees have a certain percentage of their salary deducted from each paycheck — before taxes — and put into an account. They can use the money in the flexible spending account for out-of-pocket healthcare costs, such as prescription eyeglasses, dental fees, or surgery. In addition to healthcare expenses not covered by the insurance plan, employees can opt for a flexible spending account to cover dependent care costs.
HSAs at a Glance
Proponents of Health Savings Accounts (HSAs), which were signed into law by President Bush in December 2003, say that they benefit both employer and employee. This consumer-directed health coverage pairs a high-deductible health plan with a tax-free savings account for medical expenses. Below, the basics of HSAs.
- Accounts are owned by the employee, not the employer. The employee decides how much to contribute, how much to use for medical expenses, and whether to pay for medical expenses from the account or save the account for future use.
- There’s “no use it or lose it” rule as there is with flexible spending accounts. An unspent balance in an HSA remains in the account until the employee spends it on medical care.
- Accounts are portable, regardless of whether the individual is employed or not and regardless of any changes to marital status or insurance coverage.
- HSA accounts can grow through investment earnings just like Individual Retirement Accounts (IRAs).
Source: U.S. Treasury Department
Classy Move by Touch of Class
Health insurance premiums are skyrocketing. Deductibles are increasing. But thanks to a creative solution by a hospital in Huntingburg, IN, cataloger Touch of Class and its employees are benefiting.
Two years ago, St. Joseph Hospital approached the four largest local employers, including Touch of Class, with a deal: The hospital would cut the employers a 50% discount on any hospital bills if the employers paid 100% of each employee’s hospital visit.
For St. Joseph, the benefit is that it doesn’t have to spend resources hunting down payments for patients. For the employers, the benefits are less easily measured, but no less important.
“When you tell a [job] candidate that you have 100% [hospital] coverage for them and their family, that’s pretty special, especially since the deductible and generic drugs keep increasing,” says Touch of Class president/CEO Fred Bell. “We’re buying a service for our employees, but that doesn’t mean we don’t have to be smart about it.”— MDF
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