Co-Insurance May Be Employers’ Last Option for Health Care Cost Savings

April 19, 2007

Companies that have run out of simple ways to reduce health care costs may have one last option before deciding whether to make long-term commitments to health care programs or get out of health care benefits altogether: co-insurance.

Co-insurance, which divides the cost of health services between the employer and the employee, is becoming more commonly used to replace co-pays for doctor visits, prescription drugs and other services, says James Winkler, practice leader of Hewitt’s health management consulting practice.

“Co-insurance is a way of introducing mini-consumerism,” he says.

By not paying a fixed dollar amount, employees will know how much their health care costs. And by paying a percentage of the total, consumers will be interested in finding lower-cost providers.

There are few simple options remaining to reduce health care costs. Employers are increasingly looking at developing more aggressive and longer-term health care strategies aimed at improving the health of employees and the quality of health care while also reducing costs.

A Hewitt study released Thursday (April 19) of 450 large U.S. employers who cover more than 8 million employees, shows that 63 percent of employers surveyed will look to increase education efforts, hold employees accountable for their health care costs and use various technologies to cull and analyze health data so they can anticipate ways to manage costly chronic illnesses.

More companies are enrolling employees into disease management programs by offering incentives like reduced premiums and copays for doctors’ visits and prescriptions.

The pace of rising health care costs has slowed to about 8 percent in 2007, thanks in large part to employers shifting costs to employees by raising premiums and co-pays and introducing higher deductibles.

But employers worry that continuing to shift costs will brew an employee backlash and, in the long term, do little to stem the chronic illnesses that are at the foundation of exorbitant costs.

Instead, employers are “looking beyond cost shifting and plan to invest more in the health and welfare of their employees,” the study’s authors wrote.

At the heart of the effort is getting employees more involved in their health and making them sensitive to health care costs, Winkler says. Companies are doing so by offering account-based health plans and creating incentives to go to the best and most cost-efficient doctors who follow widely accepted standards of medical practice for certain diseases.

Companies are less willing to focus on providing financial incentives to doctors who perform better than their peers.

Despite having a long-term approach, benefit managers must still prove cost savings in the short term, which Winkler defined as one to three years. Additionally, 37 percent plan to mitigate costs through changes in benefit design on an annual basis. For them, there are few easy options left.

Thus enter co-insurance and other short-term ways to reduce health care costs. These strategies include marking up premiums and then offering discounts to people who have healthier lifestyles or enroll in smoking cessation and weight loss programs. Winkler calls these “self-funded incentives” because they do not require extra money. Some employers have also chosen to pay the incentives into health reimbursement accounts to avoid taxes and to make sure the savings go toward paying for health care expenses.

Some employers may resist making long-term investments during the coming election year since health care policy may undergo major changes federally or, in the absence of action in Washington, within individual states, Winkler says.

“Large employers fear state reform that can play out in 50 different ways more than they do federal reform,” he says.

Winkler says none of the benefit managers interviewed said their company planned to get out of health care benefits, which surprised him. But, he adds, “those who choose the exit ramp [and get out of health care benefits] may well choose themselves out of a job,” a factor that may have skewed results.

CEOs, on the other hand, have expressed interest in getting out of health benefits, but none have yet been so bold as to follow through on that sentiment, saying. “ ‘I will gladly be second,’ ” Winkler says.

Jeremy Smerd, Workforce Management staff writer