November 27, 2004
The High Cost of Health
Health insurance cuts into the bottom line as costs soar in the fifth consecutive year of double-digit increases.
Health insurance costs to U.S. employers have jumped by double digit increases over the last four years, effectively doubling in some cases. This is a hideous trend for consumer technology retailers, whose product profit margins often erode at faster rates. It's not good news for their employees, either.The 2004 Annual Employer Health Benefits Survey, released in September by the Kaiser Family Foundation and Health Research and Educational Trust, found that employer-sponsored health insurance premiums increased an average of 11.2 percent in 2004. According to the survey, this is less than last year's 13.9 percent increase, but still the fourth consecutive year of double-digit growth. Premiums for employer-sponsored health insurance rose at about five times the rate of inflation (2.3 percent) and workers' earnings (2.2 percent).
While employers are starting to look at new methods and new tools such as health savings accounts (HSAs) to help hold down health care costs, there's no end to the premium increases in sight. Based on its 2004 annual survey of employers, Mercer Human Resource Consulting recently reported that if employers simply renewed their current medical plans for 2005, making no changes, the average cost increase for 2005 would be nearly 13 percent.
Everyone has been wrestling with the issue, and the wrestling continues. Some small independents, such as The Music Store in Greenfield, Mass, have found alternative, legitimate ways for their handful of full-time employees to be covered by other benefit plans. Most companies, like Aronson's Home Gallery in Chicago and The Little Guys in Glenwood, Ill., have shifted more health benefit costs on to the employees by increasing some combination of deductibles, co-pays, out-of-pocket limits and employee share of the overall benefit cost. Some retailers have started to tier health benefits plans-offering good-better-besl options-so employees can chose what plan better suits their needs.
Costco, after absorbing health benefit cost increases for nearly 10 years, in late 2003 changed its plans to shift some additional costs onto its 75,300 U.S. employees. The company's health benefits plan for full-time salaried and hourly workers and part-time hourly workers remains the best in the business. Larger retailers, such as Best Buy and Costco, are tweaking their plan designs but also are beginning programs designed to encourage their employees to live healthier lifestyles to help reduce the likelihood of medical problems-and higher premiums-in the future.
After its health insurance premiums effectively doubled in five years (with a 15 perceni jump this last year), The Music Store stopped subsidizing a health benefits plan last September. Co- owners Larry Clark and Gene LaCoy now are covered through their wives' employers' benefit plans. Another full-time employee was able to find better, cheaper benefits through his part-time work as an emergency medical technician.
Larry Clark calls the health insurance issue a back-breaker. "It's a crime that we as a country don't take better care of the population in terms of health care. I don't think it's [just] too bad. I think it's much mure serious. Fortunately, all of us here now have health insurance, and The Music Store doesn't have to pay for it."
At Aronson Home Gallery, Bob Cremer, president and CEO, says about 75 percent of the 400 employees are eligible for health benefits at the company's 10 Chicago area locations. The company's warehouse and delivery drivers have their own benefit program through the Teamsters Union. Cremer says that Aronson's non-union health insurance premiums have increased about 60 percent over the last three years; the company absorbed about two-thirds to three quarters of each annual increase and then passed on the balance to its employees.
"You explain it the best you can," Cremer says. "We have our human resources people explain what we have done. We let them know how much we have absorbed of the increase and how much we are passing on. Anybody who doesn't keep their head in the sand knows that health care has gone and continues to go up. And we are unable to absorb it all." Cremer plans to buffer future health insurance premium increases with increased sales and by managing business factors that he can control. But, he says, "I don't see any relief coming down the pike. That's a deep concern. It just seems to be an escalating thing that right now is out of control. I won't sit and be overwhelmed by it. On the other hand, I don't see any relief."
Hands are tied
The North American Retail Dealers Association (NARDA), whose membership includes both The Music Store and Aronson Home Gallery, has tried to develop a program that would help its dealers pool their buying power for health insurance. But NARDA President and CEO Tom Drake says, "We don't currently have a health care provider or a business insurance provider at this time. It's almost impossible to find a carrier that will offer your members coverage in all 50 states. Hopefully that will change as time goes on."
Dave Wexler, co-owner of The Little Guys in Glenwood, Ill., says his company's health insurance premiums increased 20 percent last year. "The year before that was 25 percent. It's gone up over 100 percent in the last four to five years. It's just not right. We keep our employees for a long time and they're getting older, and I know it gets more expensive as they get old."
Wexler expects another 20 percent increase next year; for that the company has drawn its line. "Originally we paid for the whole thing," he says. Now employees pay $18 to $20 a week for single coverage or $60 to $70 a week for family. "And we're capping what we are going to pay. Any more increase gels passed on to them. The next increase comes in; they're going to end up paying more money. It's their turn." He believes his employees will take future increases as a fact of life. "What are you going to do? Most people make people pay for the entire family plan, and we don't do that."
At Harvey Electronics, President Franklin Karp inherited a partially unionized workforce that has been part of the nine-store company for nearly 30 years. AFL-CIO Local 888 currently represents the company's 110 employees who are sales personnel, warehouse, truck drivers and installers. Approximately 50 Harvey employees, including Karp, are non-union and now pay about 38 percent of their health benefit costs.
"It's all part of the cost of doing business," Karp says. "Some of it we pass along to our employees, and some of it we absorb. I don't get any more margin on the hardware, so that's a problem." Harvey's contract with the union buffered health insurance premium increases for the company. Karp says, "They buy health care for, I think, 9,000 members. Their ability to buy health care is much greater, and they can buy it at a sleeper discount than I can buy it for [my] 50." However, he adds, "Their ability to buy has been a benefit to the company, but that benefit has been eroding. No matter how big they are, they are getting socked with increases."
The Home Theater Specialists Association (HTSA), whose buying group membership includes both The Little Guys and Harvey Electronics, tried two years ago to develop a group program. According to HTSA Executive Director Richard Glikes, "We were unsuccessful in getting the right math together. It was difficult to get enough people together in a pool."
Best Buy declined to reveal how much its health insurance premiums for its 90,000 U.S. employees have increased, but said that it has managed those increases by changing vendors, by starting education programs and by offering "a greater array of plans to allow employees the ability to access the right benefits for them and their families."
Asked how the company plans to handle future health insurance cost increases, a Best Buy spokeswoman says, "First and foremost, employee tools to help understand costs and ways that they can save money but not lose out on quality of care or outcomes of care. Second, behavior support: engage employees and their families more and more in changing their behavior about their health. Try to reduce the number of bad situations because the employee or their family member either prevented a situation, or reduced the impact of a situation through more proactive involvement in their health."
Costco has 106,000 employees worldwide, and 75,300 in the United States alone. The company self-insures its baseline health benefits programs, and this year it started to pro-actively encourage its employees to take better care of themselves. For example, company Executive Vice President Richard Galanti says some employees are being approached to take part in an obesity study. "I am impressed with pro-active stuff we're starting to look at. The likes of the Aetnas out there are pushing for that: longer, pro-active ways to help lower overall costs."
In the United Stales, all Costco employees are eligible to receive health benefits (medical, vision and dental) based on a waiting period that varies if the employees are full-time salaried, full-time hourly, and part-time hourly. Eighty-five percent of Costco's U.S. workforce is eligible for health care benefits and Galanti reported that 96 percent of those eligible for coverage take it. Costco's total cost of providing health care benefitshave increased over the last 10 years-18 to 20 percent annually over the last three or four years, Galanti said. With time, the average Costco employee age shifted from 26 to 34, the "prime marrying and baby time," he says. "The number of people covered was increasing."
Yet until early 2004, Costco did not pass on its increase in health care costs to its employees. In late 2003, Costco began to make changes to its health benefits plan, changing plan options, increasing payroll deductions, co-pays and changing coverage for part-time employees. Galanti says, "The part-time plan has higher co- pays. It's not as rich but it's still quite a good plan. With that we also grandfathered all existing part-timers for three years, so they could go full lime if they chose to." In Costco's Fiscal 2003, its employees paid for 4.83 percent of their health care benefit costs, Galanti says. After the plan changes are final in four years, Galanti estimates employee contribution rates for health benefits will be only 8 percent.
National Dilemma, National Dynamics
"When the economy was booming, health care cost increases weren't really on anybody's radar screen, they were just absorbed into the cost of doing business," says Eugene Alexander, senior benefits consultant, Health Care and Group Benefits Practice of Mercer Human Resource Consulting, based in Princeton, N.J. "With the slower economy, the finance departments have been putting additional pressure to manage the costs more effectively. Other resources are going up three to four percent, but health care is going up 15 percent, so you have CFOs visiting HR saying 'What's going on?'"
Gary B. Kushner is principal of Kushner and Company in Portage, Mich., a national employee benefit consulting and administration firm. He says, "The streak of double digit rate increases kicked back up in 1999 after a lull in the mid1f990s. For smaller employers, this began in 1997, 1998. For the larger employers the double-digit increases began in 1999."
Multiple factors are cited as driving the rising costs: Increases in per-unit services (doctors or hospitals annually raising their fees), overuse and abuse of services (unnecessary doctor's office or emergency room visits), the impact of pharmaceutical companies direct-to-consumer advertising and, some say, the impact of malpractice judgments on medical providers' treatment practices and cost.
One of the main rallying cries of employers-and health insurance vendors-seeking to lower benefit costs is to "reconnect" the employee with the cost of his or her health care and set up a benefits program that encourages employees to use the health care system more judiciously. For his part, Alexander estimates the health premium hikes could be attributed to two factors: A three to five percent cost increase for services, and an increase in utilization. "These more consumer-directed health plans are really trying to target the utilization, rather than the cost piece."
This focus in utilization is driving employers' increased use of percentage-based co-pays and higher deductibles. The idea is to shift some of the costs for health care off the employer and onto employees, and theoretically they are going to use the health care system more judiciously because it's their money being spent. "The market is not trying to tell people not to take care of things when they are sick." Rather, Alexander says, the market is trying to encourage people "to do a little homework to know when it is the right time to visit the doctor."
"There are a lot of care management tools now on the internet, even through some of the [health insurance] vendor web sites, for employees to log on and do a little bit of homework on symptoms they may be having before actually going to a provider," Alexander says. "A lot of times employers probably need to increase the communications to their employees about these tools. The vendors have the tools, but the employees are not familiar enough with them."
Kushner says, "[Employees] consume health care but don't tend to act in a consumer-like fashion, looking at quality and cost. It's very difficult to find good data on quality and cost. You have to do a lot of digging to find the resources out there. But that is beginning to change. You are starting to see public sources on quality and cost data. Medicare on its web site is publishing pharmaceutical drug costs, for example."
Beyond health plans designed to encourage employees to treat health care like they would any other purchase, one tool for managing health insurance costs that is generating a lot of buzz now is the Health Savings Account (HSA). HSAs are tax-free savings accounts designed to help individuals pay for current health expenses and save for future medical and retiree health expenses. They are different from other health savings instruments such as flexible spending accounts, medical savings accounts (MSAs) and health reimbursement accounts. (HRAs)
HSAs were created by the Medicare bill signed into law on December 8, 2003, and are designed to be used in tandem with a high- deductible health plan (HDHP) that have a minimum deductible of $1,000 for self coverage or $2,000 for family coverage. Consumers can sign up for HSAs with insurance companies and banks or through their employers acting on their behalf. Either the employer or the individual, or both can make contributions to HSAs. If the individual makes contributions, it is an "above-the-line" deduction. If the employer makes contributions, it is not taxable to the employee. Contributions can also be made by others on behalf of an eligible individual and deducted by them as well.
The maximum contribution is the lesser of the deductible amount under the HDHP or $2,600 for individuals or $5,150 for family coverage (for 2004). These dollar limits will be adjusted for inflation each year. The money invested in a Health Savings Account rolls over year after year and is not taxed if used for qualified medical expenses. Consumers can cash out their HSAs for non- qualified expenses-say to buy a boat or big-screen TV-but their money will be taxed and subject to a 10 percent penalty. The U.S Department of Treasury provides a detailed explanation of HSAs on its web site at www.treasury.gov/offices/public-affairs/hsa.
HSAs are getting a lot of attention. NARDA is urging its members to consider using them, and the major retailers are starting to explore them. Mercer's Alexander says, "Not many employers have it right now. You'll start to see employers offer this as an option on January 1." Insurance companies are starting to offer HSAs, and as the accounts attract more people and more money, Alexander says, more banks will offer HSA services, too.
The Human Impact
Kathleen Stoll is director of health policy at Families USA, a non-partisan group that bills itself as "The Voice for Health Care Consumers." Stoll is not a lobbyist but is in charge of research writing and analysis of policy proposals. Asked to talk about the rise of health care benefits costs and its impact, Stoll prefaces everything by saying, "We don't see the employers as the bad guys here." As employers try to cope with double-digit increases in health insurance premiums, she says, "You're going to feel it somewhere as a worker. Employers simply can't swallow the whole thing."
Stoll says that in addition to basic cost-shifting, Families USA has seen some employers dropping coverage ("much more on the small business side"), some movement towards more part-time temporary contract workers who may not be offered health insurance and an increased use of co-insurance and percentage-based co-pays. Stoll's main questions about HSAs are: Will they save money? Will they help drive clown health care costs?
"Will it drive clown health care inflation? I don't think so," Stoll says. "It really touches less than five percent of employer- based health care spending. It's just not grabbing or influencing enough of the spending." She adds, "I question how much consumers are able to effectively shop for cheaper care, for better quality for less money. There's not a lot of information available to consumers, and none of us are good shoppers when we are sick. The times when you are able to shop around is not when you are in a crisis."
In addition, she noted that when shopping for a primary care provider, individuals don't have the advantage of "collective leveraging of prices by a provider. So if you're going to pay an un- negotiated price, it's going to be higher than the price. The consumer is going to run through that money pretty quickly."
Stoll also is concerned whether HSAs and the accompanying high- deductible health plans will indirectly cause consumer to make unwise decisions about health care. "Particularly, will they get the check-ups, diagnostics and early treatments that will prevent more expensive treatments later?" Stoll acknowledges that HSAs can allow "first-dollar coverage" for some preventative care. "That's good," says Stoll. "That means folks won't make bad health care decisions and get that early preventive treatment that holds down treatment costs long term." However, she notes that "first-dollar coverage" means the HSAs' ability to drive down overall health care system costs is even less. "It touches even less spending."
Can HSAs, with their goal of encouraging consumers to be pro- active shoppers, influence and drive down health care costs? "I just think it's totally bogus," Stoll says. "I just really don't see these as being the solution to double-digit health care cost increases. They create a nice tax advantage for folks who can afford to put money into them. They certainly don't solve any issues for the uninsured.
"My fear is what they will really do-fear from a consumer perspective-is that they will allow businesses to pass more costs onto their workers. They have to right now. You can't keep asking a business to pay double digit inc\reases and not pass some of that on to their worker, but the HSA structure may allow them to do that in a new way."
NRF Seeks to Present Congress with Benefits Proposal
After spiraling Health Care costs became a CFO and CEO-level discussion, the National Retail Federation (NRF) hired a full-time lobbyist to be its voice and ear in Washington, D.C. Conwell Smith has been working for the NRF as its senior director of government relations since May.
Smith's overall focus is primarily health care benefits. In addition to her work on Capitol Hill, she runs the NFR's Health & Employee Benefits Committee, comprised of benefits executives of NRF member companies-both large and small. Smith estimates that the NRF's membership is facing an 11.2 percent increase in health insurance premiums. "We've seen four years of double digit increases."
NRF plans to draft model benefits legislation to present to the next session of Congress in January and February of 2005. "The game plan at NRF is to outline a menu of options, figure out what works, what doesn't and come up with a combination of things that serve both our small retailer and large retailers," Smith says.
The benefits committee is in the process of debating an array of ideas, she says. The committee's goal is to come up with a statement of guiding principles to bring before the NFR's board of directors in January. The NRF wants to be able to go to Congress and say, "Here are all the things we like in one comprehensive bill," Conwell says. "Items that are going to be in this aren't going to be new items. It's just figuring out what best fits for our industry. Many of these items already have broad-based business support."
In the past, the NRF has lobbied against state mandates of health benefits, for multi-state pooling arrangements and association- based health plans, and also for medical liability reform. Smith adds, "We absolutely believe that the trial lawyers, and the defensive medicine that has to occur to prevent law suits in medicine, are absolutely driving up the cost of medical care. We don't foresee that changing in the next few years-the votes just aren't there yet."
Among the policies and issues being considered for inclusion in the NFR's draft model legislation:
* Consumer driven health plans
* Patient safety and quality
* Liability issues
* Standardization of health insurance products across state lines
* Re-insurance, whereby the government re-insures employers health plans to protect catastrophic health care costs. (Small- business re-insurance is a part of Sen. John Kerry's health pian. Smith notes, "A lot of businesses are looking into this, but it will have to be tax-funded. How do you pay for that?")
* Tax credits
All of these issues "are going to be there in some way, shape or form," Smith says. The NFR must balance the needs of both its small and large members. Smith says, "We need to make sure what ever we do we are being very true to the industry-soup to nuts."
"Anybody who doesn't keep their head in the sand knows that health care has gone and continues to go up. And we are unable to absorb it all."
- Bob Cremer
Aronson Home Gallery
"It's all part of the cost of doing business. Some of it we pass along to our employees, and some of it we absorb. I don't get any more margin on the hardware"
- Franklin Karp
"Other resources are going up three to four percent, but health care is going up 15 percent, so you have CFOs visiting HR saying 'What's going on?"
- Eugene Alexander
Mercer Human Resource Consulting
"[Employees] consume health care but don't tend to act in a consumer-like fashion, looking at quality and cost"
- Gary B. Kushner
Kushner and Company
"We absolutely believe that the trial lawyers, and the defensive medicine that has to occur to prevent lawsuits in medicine are absolutely driving up the cost of medical care."
- Conwell Smith
National Retail Federation
"It's a crime that we as a country don't take better care of the population in terms of health care. I don't think it's [just] too bad. I think it's much more serious."
- Larry Clark
The Music Store
"It's just not right. We keep our employees for a long time and they're getting older, and I know it gets more expensive as they get old."
- Dave Wexler
The Little Guys
Copyright North American Publishing Company Nov 2004