Containing insurance expenses


December 24, 1990|By Mark Stevens

It's no secret to business owners that health insurance costs are taking a big bite out of the bottom line. If that's not depressing enough, this huge cost factor threatens to spin out of control, turning once-profitable companies into money losers.

To prevent this fate from befalling their businesses, CEOs must act promptly and decisively to control health-care expenses.

"The timing for health-care cost containment has never been better," says David Wudyka, president of Westminster Associates, a management firm specializing in human resources. "That's because employees now recognize that small companies are burdened by skyrocketing health care premiums and can no longer shoulder 100 percent of the costs.

"This gives small business owners an opportunity to implement money-saving measures without paying a steep price in terms of declining morale and rising turnover."

With this in mind, consider these guidelines for cutting health-care costs:

* Introduce "managed-care" programs, which put tighter controls on employee use of medical services. The objective is to reduce redundant or unnecessary doctor visits. Under a managed-care program, for example, the services of medical specialists are covered only if patients are referred by their primary physician.

"Another limitation applies to the use of hospital emergency rooms," Wudyka says. "Typically, patients use these facilities for routine care when their doctors are out of the office. Because this can add substantially to healthplan costs, managed-care programs will often limit emergency room visits to those cases where immediate medical attention is required. If this litmus test is not met, the emergency room visit will not be covered."

* "Flexible benefit" programs give employees the option of choosing from a menu of benefit plans including dependent care assistance, group life insurance as well as medical coverage. This motivates some employees -- especially those whose spouses obtain family coverage from their employers -- to substitute medical coverage for one of the other options on the menu. Because these selections are often less expensive than medical coverage, the employer saves money while at the same time offering everyone a broad range of benefits.

"Employees are always interested in having their employers increase the kinds of benefit programs available to them," says Glen Shively, chairman of the health industry practice for the accounting and consulting firm of Coopers & Lybrand. "The problem is each new benefit carries a new price tag. But with flexible spending, the employer can set a dollar figure he is willing to spend and can let employees decide how they want to spend it."

* Increase the employees' share of health-care costs. This can be done by raising annual deductibles before the health coverage kicks in. If the deductible is now $500 per family, consider raising it to $750. Or explore the feasibility of raising co-insurance from 20 percent to 30 percent.

* Give employees the incentive to use medical services sparingly. This can be done by setting a cost ceiling per employee and offering to pay a percentage of the net savings to employees that spend below that level. This helps to keep health-care coverage in place while giving employees a vested interest in reducing the unnecessary use of medical services.

"While cutting costs is a key part of a cost-containment program, employers should explore new ways of reducing premiums," Wudyka says. "One approach is to join together with a group of companies, using your combined buying power to extract a better rate from the carrier. With this in mind, ask several carriers to compete for the group's business, making it clear that the low bidder will pick up all of the coverage. This gives small companies more clout than they can muster when negotiating with the carriers independently."

Adds Glen Shively:

"By joining together for the purpose of acquiring medical coverage, small companies gain some of the leverage of their larger counterparts. That's because the insurance companies view them not as a bunch of little companies but as a larger force to be reckoned with."

Consultants, trade associates, and insurance brokers can help you explore strategies for cutting health-care costs.

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