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SUBJECT: Personnel Systems - Health and Wellness, or Supply Systems - Medical

ALPHANUMERIC IDENTIFIER:

KEYWORD: Health care, medical, benefits, insurance

OVERVIEW:

Health insurance has become an increasingly important component of employee’s total compensation to both the employee and the employer. Medical coverage is so commonplace today that many employees treat it as a basic right. Until recently, health care costs were growing at a considerably higher rate than inflation. As a result, employers have been forced to focus efforts on reducing these costs to ensure they can continue to provide this "right" and still remain competitive.

Health insurance typically falls into one of three categories: indemnity (fee-for-service [FFS]), preferred provider organization (PPO) and health maintenance organizations (HMO). Indemnity insurance is the least restrictive, allowing the insured to use any provider for covered benefits. In order to discourage "unnecessary" utilization, indemnity insurance typically carries a high deductible (an amount that must be paid, e.g. $500 before the insurer pays anything) and coinsurance (a percentage of the bill, e.g. 20% which the patient must pay). Indemnity insurers typically do not contract directly with providers and therefore pay higher fees. As a result, indemnity is typically the most costly form of coverage.

PPOs and HMOs both attempt to limit the provider network to a group the insurers have contracted with at favorable rates. PPOs typically include an "opt-out" option if the insured chooses to use a non-contract provider. The insured individual pays a greater portion of the cost when he or she "opts-out." HMOs are the most restrictive form of coverage and typically require an individual to use a certain panel of providers except in emergency situations. As a result, HMOs are typically the lowest cost coverage. PPOs and HMOs typically use copayments (fixed fee per visit or per prescription) rather than deductibles or coinsurance. While these nominal amounts do help lower the employers insurance rates, they are not typically considered large enough to discourage preventative care as is the concern when using deductibles and coinsurance.

The cost of health care coverage is often greater than 10% of base pay and can approach 15% when it includes dental, vision and employee assistance programs. As would be expected, the costs tend to be greater in unionized plants. The strongest unions have been known to negotiate indemnity coverage with little or no deductible or coinsurance. Costs also vary based on the composition of the workforce. A workforce of young, single males is considerable less expensive to insure than a workforce of female employees or employees with families. These groups in turn, are less expensive to insure than a workforce of individuals nearing retirement.

Controlling health care costs can be a very difficult management challenge. The biggest one-time savings in health care costs occur by moving to a more restrictive form of insurance (to a PPO or HMO). Many employers are also reducing costs by requiring employees to pay a portion of the monthly insurance premium. Which of these two is more feasible depends greatly on the group dynamics. A group that favors choice is likely more willing to pay a portion of the insurance premium. A group of individuals who rarely see a doctor may prefer a more restrictive panel of providers in order to avoid paying more "out-of-pocket." Smaller savings can also be made with the introduction of wellness programs, smoking cessation programs and on-site workout facilities. Insurance underwriters often give discounts to companies that invest in these programs. However, the cost of implementation may outweigh the savings. Some plants also employee on-site, health care staff to treat minor injuries and avoid more costly care.

Over the last ten years, a greater number of large employers have moved to self-insurance. Self-insurance cuts the insurer out of the middle. Employers either contract directly with health care providers or "rent" the access to an insurer’s network for a fee. The employer then sets aside money to pay for services its employees require. It may pay an outside claims processer to process the claims for a fee or do this in-house. Large employers are best suited for self-insurance since they have a significant base over which to spread the risk of large claims. The savings of self-insurance must be weighed against the dilution of management time (it is not in the health insurance business) and the additional costs required to hire experienced staff, print benefit handbooks, process claims and respond to employee questions.

REFERENCES: The HMO Handbook, Personal experience as Regional Director of an HMO

ACKNOWLEDGEMENT: This is a March 29, 1999 revision by Gene Goodson of an assignment for OM742 contributed by Tim Dick.