When employers and consultants gripe about the steep rise in health-benefit costs these days, car metaphors seem to crop up an awful lot. The rate of premium increases, they say, is “accelerating.” Benefit costs, many note, are “out of alignment” with other corporate expenses. No doubt, when the price becomes more than employers can handle, an idiot light will go off on the dashboard, indicating an engine failure.
The automotive terminology may make the chaotic seem cozier. But it also conveys the sense that benefits costs are swerving out of control. Indeed, many CFOs are fast realizing that new ways of containing health benefit costs must be developed before those costs start dragging down corporate earnings.
That CFOs should care about this topic at all speaks volumes about the recent spike in premiums. In the late ’90s, managed care — along with a low rate of inflation — kept corporate health-care costs relatively in check. Besides, with many companies turning record profits back then, CFOs tended to focus on more strategic issues — things like spin-offs, mergers and acquisitions, and tracking stock. Health-care? That was way down the list — with the actual purchasing and administration of plans often left to HR managers.
That’s all changing. While payrolls and revenues have plummeted in the recent economic downturn, employers are now seeing double-digit jumps in health-care plan premiums. “When it hits the teens,” says Randall Abbott, a senior consultant with Watson Wyatt Worldwide, “it hits the CFO’s radar screen.”
It’s hit the teens. Last month, Watson Wyatt released the findings of a survey on the medical plans of 200 employers. The results were downright startling. Respondents predicted a 13.6 percent rise in health-plan costs in 2002. In 2000, that number was more like 8 percent. Respondents also said they expect drug costs to increase a whopping 17 percent next year.
Some industry experts believe corporate health benefit costs may run even higher. As we reported in July, benefits consultancy William M. Mercer advised its clients that HMO premium increases of 20 percent were typical, and that some employers were getting socked with hikes of more than 50 percent.
Ironically, employers may have only themselves to blame for these premium health-care premiums. To keep workers from jumping ship in an era of full employment, many companies offered workers a wider array of health-care benefits. In addition, the rank and file have won the right to choose from longer lists of doctors and hospitals.
By offering greater choice to employees, employers have pretty much gutted the bargaining power of health maintenance organizations (HMOs). Steven Cohen, CFO of Cybercare, explains that if an HMO keeps adding providers to its network, it ends up delivering fewer patients to each doctor. Fewer patients means M.D.s are less inclined to offer HMOs a cheaper rate for services rendered.
Before he joined Cybercare, which provides online medical exams to in-home patients, Cohen was CEO at HIP Healthplan of Florida, an HMO. “One of the things we warned many of our clients,” he says, “is to skinny the network or lose your negotiating position.”
At many companies, the networks didn’t get skinnier. The results were predictable. Faced with sizable jumps in doctor and hospital costs, managed-care providers turned right around and walloped their corporate customers with some sizable increases of their own.
The Sorest Thumb
This defanging of managed care has lead some CFOs to take a long, hard look at their existing corporate health-care plans. Beyond traditional peer-to-peer benchmarking, some finance chiefs are beginning to assess how their corporate health-care costs stack up against other worker benefits. Mostly, CFOs want to see what percentage of their overall benefits budget is going to employee medical plans.
By that measure, medical coverage sticks out painfully, often the least controllable item for many companies. “Very few corporate expenses are clicking up at 14, 15, 16 percent a year,” says Abbott. “It is the only thing going.”
Double-digit hikes could lead to a rollback of other employee benefits, cautions Robert Greving, senior vice president of finance for UnumProvident, a disability insurer. If a plan sponsor wants to limit the average employee’s total benefits to no more than one-third of salary, spikes in health-plan premiums might force that company to pare things like 401(k) matching contributions. If the recent rise in the cost of medical coverage starts pushing total benefits costs to 37 percent of payroll — with 39 percent in the offing — other benefits will likely be cut. “At some point,” notes Greving, “you say these benefits are costing too darn much.”
Deciding which benefits to keep — and which to trim — could turn into an employee-relations nightmare. Although health-benefit bills are skyrocketing, employers tend to tread gingerly when fiddling with workers’ health-care benefits. As Greving points out, employees tend to worry more about their medical insurance than, say, what their income is likely to be at age 65. Certainly, any attempt to shift more of the costs of medical coverage onto workers will not win bosses any popularity contests.
Greving notes that management at the Chattanooga, Tennessee-based UnumProvident hasn’t yet been forced into an either/or benefits choice. But if medical-plan premiums keep rising, that could change. Says Greving, “Those are the decisions we’re ultimately going to have to make.”
Our First-Ever Turnip Analogy
Managers at InSport International have already made some tough decisions about the company’s health-care plan. Jim Hauseman, CFO and controller at InSport, points out that the sales at the company, a distributor of running shorts, have held at about $16 million a year during the past five years. But with medical costs going up, management at the Beaverton, Oregon-based company has seen its health-benefit costs climb from 20 percent to 33 percent of net profit during that same period. While InSport pays out only about $120,000 a year for employee medical benefits, the company generates only about $400,000 in annual profits. “When you’re not growing,” says Hauseman, “it’s sort of advantageous to get [health-benefit costs] at least to slow down a little.”
The urge to apply the brakes got even stronger this year. That’s when InSport’s managed-care provider slapped the distributor with a 13 percent hike in premiums. Hauseman and other executives at the company decided it was time to start considering alternatives to standard managed-care programs. In April, after debating several other options, the company rolled out a defined-contribution (DC) health plan. Under this sort of plan, employers put fixed amounts of dollars each month into employee health-benefit “accounts,” and employees choose how the money is spent. So far, Hauseman admits, it’s not clear that the DC plan has cut health-benefit costs at InSport. What the plan has done, however, is empower the company to specify what its future outlays will be, giving it a powerful antidote to the effects of medical inflation, says the CFO. (For more on DC health-care plans and other ways companies can cut health-benefit expenses, see “Malpractice and Best Practice.”)
Watson Wyatt’s Abbott warns that CFOs should not make changes to health-benefit plans based solely on one metric, however. Trotting out an automotive analogy of his own, he says a CFO should use a financial dashboard that includes a variety of gauges to check benefit costs on a quarterly basis. “There is enormous danger in focusing on just one element,” he notes.
As Abbott points out, checking premiums against payroll may be a valuable way to strike the right balance between benefit and compensation costs. But, he adds, “the problem with tracking it as a percentage of payroll is that you don’t know if your cost is high or low relative to competitors.”
Many employers simply accrue their benefit expenses on a per-employee basis and monitor them that way. But Abbott claims such an approach can cause bookkeeping problems in these times of heavy layoffs. Although workers leave a company, their claims might stay in the system. It could be months after a layoff, for instance, that a self-insured employer cuts a check to pay for the health care a worker received while still on the job.
To avoid understating its liabilities, an employer should wait 90 days after a big layoff before it stops accruing the benefit costs of the terminated employees, Abbott says. “I have to keep my bodies until the claims flow through,” he adds.
Abbott also recommends that CFOs who work for companies with a choice of health plans set benefit budgets and monitor premium increases for each plan. This approach could prevent disproportionate cross-subsidies, he says. A company, for instance, might be saving a great deal on its preferred-provider option, only to cough up the money on an overly generous indemnity plan.
Still, benchmarking only tells a finance chief if something is out of whack — it doesn’t fix the problem. And few believe that the standard remedy for runaway health-care costs — tougher managed care — will work this go-round. Concedes UnumProvident’s Greving: “We’ve probably realized all the cost-cutting-benefits from managed care that we can squeeze from that turnip.”