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Battling Health Care Costs: Round Two

A consortium of Florida colleges and universities had a great idea to save on medical insurance expenses. But when expenses spun out of control, the institutions needed a new strategy.

By Mark Weinstein and W. David Heron

When we established a self-funded, multiple-employer welfare association (MEWA) in 2003, we—the nine members of the Independent Colleges and Universities of Florida—were proud of our effort to take control of spiraling employee health care costs. The newly created Independent Colleges and Universities Benefits Association (ICUBA) offered employers economies of scale and further diversified their employee health insurance risk pool. (The article “Coming Together to Cut Health Care Costs” in the September 2003 Business Officer, available at www.nacubo.org, details the initiative’s launch.) We reached the necessary compromises to move from institutions’ myriad employer-sponsored health plans, several of which were HMOs with little consumer engagement (i.e., almost no out-of-pocket responsibility to the employee and family). Instead, we switched to a Preferred Provider Organization (PPO) medical plan with three options. When we rolled it out that first year and the majority of employees chose the highly prized “gold” option, disaster ensued.

ICUBA’s goals were to stabilize annual premium rate increases and to provide service in the administration of employee health insurance benefits. We were committed to keeping the cost of administration to less than 12 percent of premium collected; this allowed ICUBA to spend 88 cents of each premium dollar directly on employer/employee benefits (significantly more than a fully insured employee health insurance product). Insurance companies were strapped with numerous fixed expenses, including taxes, from which ICUBA was exempt. This self-insured plan allowed member institutions to take advantage of a large employer health care benefits model.

It was a great start. On April 1, 2003, ICUBA rolled out its self-funded PPO medical plan with gold, silver, and bronze options. The gold plan attracted 93 percent of eligible employee families with its low cost; it required little out-of-pocket responsibility from participants who used in-network services (see chart, “ICUBA Gold Medical Plan In-Network Benefits”). But, in fact, it was significantly underpriced. This initial strategic pricing error nearly killed the plan in year one.

For the year ending March 31, 2004, ICUBA had a $1.8 million deficit and finished its first year as a MEWA with a net operating loss of $5.6 million. Because we had to keep capital surplus at the million-dollar level, ICUBA employers were assessed $10 million between November 2003 and July 2004, or the equivalent of about 4.5 months of employee health insurance premiums totally funded with employer monies. Something had to be done.

A Rocky Beginning

With the continual run of bad news in the first year, the ICUBA board was forced to meet on a monthly basis. To show solidarity to the campuses and to the regulatory authority, a committee made up of the executive director, the outside account, the chairman of the board, and the board treasurer met with the state insurance commissioner’s office. Withdrawing from the plan was not a palatable option because each institution had signed a five-year commitment. As the assessments continued to mount throughout calendar year 2004, one university did withdraw without permission (legal action was pursued against that institution). By late fall, it was obvious that the large institutions were causing the biggest and the greatest number of financial losses. As a result, three institutions absorbed the final assessment of 2004.

Getting Back on Our Feet

By the following December, we were back on our feet, with a surplus of almost $7 million. Accomplishing that $9 million financial turnaround in two years required strong steps. The resulting surplus stemmed from greater network provider discounts and from consumers taking more responsibility for health care costs. ICUBA employers’ actual total cost for employee health insurance coverage beat average Florida employer health care costs for two years in a row. While we were pleased by the turnaround, we knew that for ICUBA to grow and survive, we needed to assure employers that future assessments were unlikely.

Fresh start. We committed to three strategies. First, member employers introduced high-deductible medical plans in conjunction with Health Reimbursement Arrangements. Institutions make an investment in the employee by diverting a small portion of cash compensation into an HRA. The employer then uses HRA monies to persuade employees to choose higher deductible plans that increase in annual premium by a lesser amount than typical health insurance plans.

Second, we changed carriers from Cigna of Florida to Blue Cross Blue Shield of Florida for the next open enrollment (April 2005). The discounts from Cigna were 1,000 basis points less than the discounts from BCBS. Employees were pleased with the selection of BCBS as the provider network carrier.

Third, ICUBA worked on a better medical management platform. We focused on giving the quarter of employees who spend 80 percent of the monies (about $20 million per year) the tools they required to get quality medical care, such as a $400-per-year wellness checkup, free from deductibles and co-pays; a $25 premium refund for completing an online health screening; and a free Employee Assistance Program benefit. ICUBA also created a medical management model to ensure that the 75 percent of employees who use the medical plan infrequently do so effectively. The idea is to get participants to seek early intervention—when medical care is most effective and least costly.

Health Reimbursement Arrangements. Had we gone forward with the original gold plan, the annual price increase would have been 42 percent—tantamount to admitting that ICUBA was a failure. We came up with another “Risk and Reward” plan, which would cost 8 percent less. But a key question arose: Since the gold plan had no coinsurance, how would we get employees to accept this new plan with its higher deductible ($1,500 vs. $0) and a 20 percent coinsurance? We used an HRA as a carrot.

The only way this carrot would work, however, was to make it easy and attractive. Funds in the HRAs (employer-contributed dollars) would cover all eligible medical expenses allowed under the law, including over-the-counter medicines. The HRA could also be used for long-term care insurance premiums. These funds would be completely portable after a three-year vesting. The balance would earn quarterly interest equal to the same rate paid to the MEWA on its $1 million solvency deposit with the state of Florida. After 36 months of continuous participation in the medical plan with an HRA, the employee would vest and could use the monies to pay for retiree health insurance premiums and COBRA premiums.

The typical employer premium for single employee health insurance coverage in the gold plan was scheduled to increase from $213 in 2003 to $303 on April 1, 2004. However, if an employee instead enrolled in the 2004 Risk and Reward plan with the HRA attached, the employer premium would decrease from $213 in 2003 to $196 in the subsequent year. The employer could then put the difference—$107—into an HRA monthly and be in the same position as with the projected 2004 gold plan premium.

This past April, total premiums for PPO 70 and Risk and Reward medical plans increased by 5 percent and 3 percent, respectively, over the 2004/2005 fees for those same plans. The employer HRA contributions are the same amount as last year for both plans; the deductibles, coinsurance, and out-of-pocket limits also remain the same. The encouragement seems to be working—the high-deductible plans offset by the HRAs are reducing the enrollments on the lower deductible plans by 8–10 percent per year.

Plan design. We designed the medical plans so that the deductible does not apply to physician or mental health provider outpatient office visits, emergency room or urgent care center visits, or prescription drugs. We cover certain wellness procedures at 100 percent. Deductibles apply to outpatient surgeries, inpatient services, diagnostic tests, and labs. We wanted to ensure that cost constraints didn’t pose barriers for plan participants. As of February, more than 60 percent of ICUBA employees were participating in the PPO 70 or Risk and Reward plans. Almost all of these employees have HRA contributions from their employer (one institution is still resisting the HRA system; all others are contributing at least something). We believe the HRA employer funding greatly facilitated this migration.

It was important to the employers that wellness benefits generate no out-of-pocket costs except for the office visit co-pay or coinsurance. We preferred to give the employee’s family and physician a broad range of choices about how wellness benefits would ultimately be delivered. After several months of exploration with the human resources advisory committee, made up of employer representatives from each ICUBA institution in conjunction with BCBS, we designed a list of covered wellness benefits. Preliminary indications are that employees are using these benefits at a higher rate than a typical beneficiary of an employee health insurance plan nationally.

Rolling With the Punches

Our mistakes as well as our ability to reverse those setbacks have made us positive about the future. We have a renewed belief that ICUBA employers can achieve more through collaboration than individually.

But our work is not done; we are continually exploring ideas. We’re currently looking into captive insurance arrangements in South Carolina and Vermont to determine how ICUBA employers can more effectively capitalize the insurance risk pool with letters of credit and can remove the possibility of assessments. After recovering from going down for the count, we are optimistic about what lies ahead.

Mark Weinstein is executive director of ICUBA, Orlando, Florida. W. David Heron is chief financial officer, Nova Southeastern University, Ft. Lauderdale, Florida.