Cover Story - May 2008
By Ken Ortolon
How insurance companies spend the premium dollars they receive from employers to pay for the cost of employees' health care is a mystery to most business owners. All they know is that their health care expenses continue to rise. As a result, they're often forced to play a very expensive game when it comes to choosing the health plan that uses their money wisely. Choosing the wrong health plan can have disastrous economic consequences for an employer's bottom line.
Texas Academy of Family Physicians (TAFP) leaders were shocked last fall when UnitedHealthcare raised the health insurance premiums for their 11 employees by 23.5 percent. They faced a tough decision. Accept the budget-busting rate or look elsewhere for cheaper coverage.
"The academy, like any small business, struggles with providing benefits for our employees," said TAFP Chief Executive Officer and Executive Vice President Tom Banning. "We started looking at where our premiums were going and what United had proposed. And we just didn't see the value in that."
Faced with a take-it-or-leave-it offer from United, TAFP decided to leave it. It accepted a Blue Cross and Blue Shield of Texas plan that provides a health savings account (HSA) tied to a high-deductible health plan. While that could mean higher out-of-pocket costs for its employees, TAFP's premiums dropped from about $65,000 to $31,000, Mr. Banning says. TAFP used some of that savings to help fund the employees' HSAs.
"It was not an easy choice," Mr. Banning said. "We had a pretty long, detailed, thoughtful conversation with our staff about what they wanted, what they expected, and the academy's role and responsibility."
Similar skyrocketing health care costs for employees are ravaging small businesses across Texas. Most have no idea if those cost increases are justified. They don't know how much of their premium dollar the health plan spends on care for the employees versus how much goes to the health plan's administrative costs and bottom line. And why.
That could change. A little known law passed in 2007 gives employers the right to ask their health plans exactly how much of their premium dollar is spent on health care. This information is a health plan's "medical loss ratio," and organized medicine is teaming up with small business representatives to urge employers to ask questions. (See " What Is Your Ratio ?")
"Unless they ask, they're not going to get the information," said Austin obstetrician-gynecologist Albert T. Gros, MD, chair of Texas Medical Association's Council on Legislation. "And for those who do ask, it's really an eye opener."
When the Harris County Medical Society (HCMS) requested its medical claims history from Blue Cross after large premium increases in both 2005 and 2006, it too was unpleasantly surprised.
"We've had some very large increases the past two years," said Executive Vice President Greg Bernica. "We got copies of our actual experience from them [Blue Cross], and it just does not seem to justify the level of increase that they have provided to us."
HCMS offers its 21-member staff a choice between a PPO product and an HSA. In 2006, the society was jarred by a 22.4-percent increase for its PPO and a 21.7-percent increase in HSA premiums. That, Mr. Bernica says, was despite the fact that Blue Cross paid out only 67 percent of premium dollars for care under the PPO, and only 9 percent under the HSA during the previous year.
The following year, premium dollars spent on health care fell to 51 percent in the organization's PPO, but premiums still rose 12.4 percent, Mr. Bernica says.
Adding insult to injury, when the Houston Chronicle asked Blue Cross officials why Harris CMS's premiums rose so much, they could not or would not be specific as to how the renewal premiums were calculated. They said the rates likely were affected by several factors involving the society's own employees, as well as trends involving 19,000 other companies with which it was grouped for rating purposes. Just which companies and where those companies are located wasn't disclosed either. Blue Cross officials also said factors such as employees' ages and the type of medical claims filed also may have influenced premium rates.
The law passed in 2007 only requires insurers to disclose actual health claims paid, not how rates are determined.
Where's the Value?
TMA and TAFP have initiated discussions with the Texas chapter of the National Federation of Independent Business (NFIB) to encourage employers to utilize the new law, sponsored by state Rep. John Smithee (R-Amarillo), to force health plans to be more forthcoming about where premium dollars are going.
"If we want health plans to compete for small business, we've got to make the market more transparent," Mr. Banning said. "We've got to find a way to incentivize plans to compete, which should drive down costs, much like it did in the medical liability market."
NFIB/Texas Legislative Director Lance Lively says he hears concerns about health care coverage from his members every day.
"The No. 1 issue on the small business owner's mind in Texas is heath care and providing health care for their employees," Mr. Lively said. "That's what's truly scaring my folks to death. And the gap seems to be widening with rising premiums. When premiums go up, all we're doing is driving more people into the uninsured world."
NFIB encourages its members to request information on their medical claims history. Mr. Lively sees that as an important mechanism for employers to learn where their premium dollars are spent and whether they are spent wisely, particularly in light of continuing premium increases.
After getting United's premium increase proposal last year, TAFP requested its claims data and found that only 74.8 percent of its premium dollars actually went to medical care. That, Mr. Banning says, didn't seem to justify the huge premium increase United sought.
TAFP also asked United for factors affecting its rates and found the biggest ones were changes in age and gender of its employees. While its actual medical claims history didn't seem to justify the large premium increase, United used the fact that a high percentage of TAFP employees are females of childbearing age to boost rates.
"They used that demographic rationale to increase premiums the most without looking at any other factors - whether they were married, whether they had children, and whether they're planning to have children," Mr. Banning said.
Justifying the Percentages
Physicians and employers increasingly question the value health plans provide for the premium dollar. In a commentary published in the April Texas Medicine , TAFP President Linda Siy, MD, of Fort Worth, said the 26 percent of her organization's premiums that went into administrative costs and profit is too high. (See "Feeling the Health Insurance Squeeze," April 2008 Texas Medicine ," page 3.)
"Something is seriously wrong with our health care system," Dr. Siy wrote. "In a time of record health insurance profits and obscene executive compensation, how are these health insurance costs justified?"
Even the insurance industry's own data suggest medical loss ratios such as those experienced by TAFP and HCMS are out of whack.
Testifying before the U.S. House Committee on Small Business in March 2007, America's Health Insurance Plans President and Chief Executive Officer Karen Ignagni said studies show 86 cents out of every premium dollar go directly toward paying for medical services.
"Embedded within the 86 cents are the costs of medical liability and defensive medicine, which are estimated to be 10 cents of the premium dollar," she added. "Of the remaining premium dollar, 5 cents goes to consumer services such as prevention, disease management, care coordination, investments in health information technologies and health support, provider support, and marketing. Six cents goes to costs associated with government payments, regulation and claims processing, and other administration. Health insurance plan profits comprise 3 cents of the premium dollar."
Dr. Siy says health plans hit small employers with double-digit premium hikes "because they can."
TMA and TAFP believe small employers can force a little more transparency on the health plans and make them justify their premium increases. They are working with NFIB to educate employers about the new law and about how to seek information on the medical claims history.
"It's important to recognize that physicians are small employers, and physician practices face the same challenges of providing insurance or health care coverage to their employees as do the local restaurateurs or the hardware store owners," said Darren Whitehurst, TMA vice president, public affairs.
With the recent emphasis about pricing transparency in the health care market, TMA and TAFP hope their collaboration with NFIB will ultimately lead to legislation requiring health plans to be more transparent. Insurers would be required to disclose how an employer's premium rates are calculated at renewal and how much of that premium is used for something other than health care. This would foster more competition and make health care more affordable. That legislation, however, has not been developed.
Meanwhile, the Texas Department of Insurance (TDI) acknowledges that it receives numerous complaints from employers about double-digit premium increases, but says it has little authority to intervene.
"That's always been a concern among small employers who get unexpected rate increases, especially when their group's claims have been very low," said Dianne Longley, director of research and analysis in TDI's Life, Health, and Licensing Division. "They just don't understand why their rates are going up."
Ms. Longley says TDI does not regulate rates, but does restrict variations in premiums a plan can charge from one employer to the next.
These "rate bands" limit how much a health plan can increase its premiums based on the health status of the group in question. Currently, plans cannot raise premiums for groups with high utilization of medical services more than 67 percent above its base rate for a group with relatively healthy employees.
If an employer complains, TDI will determine whether a plan complies with the rate bands, but it cannot tell an insurer where to set its base rates, she says.
TDI has information on its Web site to help small employers understand how small group rates are set.
Ken Ortolon can be reached by telephone at (800) 880-1300, ext. 1392, or (512) 370-1392; by fax at (512) 370-1629; or by email at Ken Ortolon.
What Is Your ratio?
The Texas Medical Association has developed a worksheet to help employers calculate their medical loss ratio so they can see where their premium dollars are going. The association plans to share that worksheet with the National Federation of Independent Business for use by its members. It also encourages TMA members to use the worksheet to find out how the money they spend to insure their own employees is being spent.
The worksheet is on the TMA Web site at www.texmed.org/business.
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TMAIT Can Help You Get the Coverage You Need Easily and Economically
Like other small employers, physicians are seeing huge increases in premiums for the health coverage they provide their employees. But the Texas Medical Association Insurance Trust (TMAIT) may be able to help physicians hold the line on their health insurance costs.
TMAIT offers health coverage for TMA physician members, their families, and their practice staff through several major health plans, including Blue Cross and Blue Shield of Texas, Aetna, UnitedHealthcare, and Humana.
TMAIT staff will meet with physicians to find out what type of coverage they are looking for, then shop the market to find the appropriate coverage at an economical price. James Prescott, TMAIT associate administrator, says the rates and coverage offered by the plans frequently vary by city.
Frequently, when physicians face premium increases, TMAIT is able to shop the market and find similar coverage from another company for a smaller increase, or maybe even a lesser rate than the physician previously was paying, Mr. Prescott says.
TMAIT offers both group coverage for physicians and their staff, and individual coverage for just the physician and his or her family. Physicians must be TMA members to participate.
For more information, contact Nealy Ramirez, TMAIT new business manager, at (800) 880-8181, or by email at email@example.com.
Houston Effort to Develop Small Employer Coverage Fails
Houston health care leaders in 2006 thought they had come up with the perfect product to help small employers there provide insurance coverage for their workers. Unfortunately, the employers won't be able to buy it because no insurance company will sell it to them.
Working with the Texas Department of Insurance (TDI), the Harris County Healthcare Alliance (HCHA) developed a health insurance offering that provided basic coverage at an affordable price.
"One of our goals had been to try to reduce the number of uninsured here in the county," said Lewis Foxhall, MD, president of the alliance. "Around a third or so of the population is uninsured."
It appeared an overwhelming number of small employers who had seen the details were willing to buy it. There was only one stumbling block: HCHA and TDI couldn't find any carriers willing to sell it.
Dianne Longley, director of research and analysis for the TDI Life, Health, and Licensing Division, says the health benefit plan developed with HCHA was the end product of three state planning grants received from the federal Health Resources and Services Administration over five years. The first two grants allowed TDI to research who the uninsured are, what type of coverage they are interested in, and other background information needed to develop a benefit product. The third grant, for $398,500, funded development of the product itself.
Under that third grant, TDI and HCHA put together a work group of insurance carriers, local governments, employers, hospitals, and physicians that began analyzing the data collected on what type of coverage small employers wanted and what they were willing to pay for it. The group also hired an actuary to design a plan that could be offered at about $150 per employee per month.
"That was about the point where we felt like you could get a benefit plan that had some value, and it was about the maximum amount that we could charge and have enough employers purchase it that it would be worth pursuing," Ms. Longley said. "There were a lot of employers who would not spend more than $50 a month or $100 a month. We just felt for that kind of money you really couldn't design a commercial plan that would be of much value or that an insurance carrier would be interested in administering."
Ms. Longley says the research showed about 40 percent of small employers in Houston would purchase the coverage if it were priced at about $125 to $150 per month. They settled on $150, assuming the employee would pay between $25 and $50 per month, with the employer picking up the rest of the tab.
The final product actually offered two different coverage options. Dr. Foxhall says one focused more on primary care and preventive services and one was designed for catastrophic care.
The first option was a basic benefits plan that covered physician office visits, $1,500 per year in prescription drugs, five days of hospitalization a year, and two outpatient surgeries per year. That plan had a deductible of $250.
The second had a $1,200 deductible but provided higher levels of coverage for hospitalization, surgery, and acute care needs.
Ms. Longley says two options were chosen because they felt the choice would increase the number of employees willing to participate.
TDI and the alliance were excited about the product, particularly after meeting with a number of small employers in the Houston area to describe the plan. Ms. Longley says 88 percent of employers they talked to indicated they would purchase the coverage if it were available.
Problems arose, however, when the proposal was presented to insurance carriers. During a conference with carriers, concerns were raised about the fact that the plan used a modified community rating system that allowed price adjustments only on the basis of age and gender of the employees, not health status or other factors. Carriers also did not like a feature of the proposal that allowed employers to sign up for coverage online without having their employees fill out lengthy health questionnaires.
Once the product was developed, TDI's involvement ended, but HCHA put the plan out for bid despite the carriers' concerns. Four carriers responded, but none was willing to use the modified community rating or online enrollment.
"Without the rating methodology and limits on adjusting rates based on health status, the health care alliance felt like you lost some of the attractiveness for employers," Ms. Longley said. "You certainly lost the simplicity the employers were looking for."
The alliance asked the carriers to resubmit their proposals using the community rating but allowed them to adjust the price. Only one carrier responded and, despite efforts to negotiate a final product, the benefit plan was never offered to Houston-area employers.
"We did get fairly close with that one group," Dr. Foxhall said, but added that they never could overcome concerns about use of community rating.
"We were all extremely disappointed that Houston didn't end up with a small employer product," Ms. Longley said. "But I do think the experience was very valuable for everyone."
The Texas Health and Human Services Commission used much of the research and benefit design that went into the effort in its Medicaid reform efforts, specifically in the design of a health opportunity pool to help subsidize premiums for working Texans, Ms. Longley says.
Meanwhile, the health care alliance has not given up on providing coverage for small employers. Dr. Foxhall says the group is now working on developing a three-share program in Harris County. A three-share program is a health plan in which an employer, an employee, and a governmental entity each pay a share of the insurance premium.
And Ms. Longley says TDI received $750,000 under House Bill 1 passed in 2007 to provide grants for three-share programs. A grant award was expected to be announced sometime in March or early April.
HHSC Funds Health Care Programs
A health care coalition and a council of governments will share $1 million in state money to develop health care programs for employees of small businesses in Texas.
Surveys show two-thirds of uninsured adults in Texas work, but many of them work in businesses that don't offer insurance, or the cost is too much for low-income employees.
The Texas Health and Human Services Commission (HHSC) awarded the grants to the Texas Communities Healthcare Coalition and the Brazos Valley Council of Governments.
The healthcare coalition received $700,000 to develop multi-share programs in five areas. The coalition plans to implement programs in 2008 in Galveston and in Travis, Hays, Williamson, Burnet, Caldwell and Burnet counties. The coalition will develop programs in Houston, Dallas, and El Paso in 2009.
The coalition estimates it will enroll 45,000 people in its multi-share programs.
"We want to create a culture of insurance in our state and support innovative local programs working to reduce the number of uninsured Texans," said HHSC Commissioner Albert Hawkins.
HHSC awarded $300,000 to the Brazos Valley Council of Governments to fund a multi-share program for Brazos, Burleson, Grimes, Leon, Madison, Robertson and Washington counties. The council plans to enroll 5,000 people in its program.
The legislature authorized the grants last year when it passed Senate Bill 10 to support the development of local multi-share programs. Such programs split the cost of coverage among the employer, the employee, and another source, such as a foundation or public entity.
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