HEALTH CARE

Health Care’s Cost-Benefit
With insurance costs rising, some employers are turning to a different model. But will employees find the new trend confusing?
By Meghan McCarthy
Updated: March 13, 2012 | 1:26 p.m. March 8, 2012 | 5:00 p.m.

Last year was a bad one for Mike Remick, as several of his employees were diagnosed with cancer. The downside was not just the anxiety and heartbreak that goes with a life-threatening disease, but also what the treatments did to his company’s health insurance costs. Remick, who has run the Rochester Athletic Club in Minnesota since 2008, was facing a 38 percent increase in his insurance premiums in 2012 to keep his company’s Blue Cross and Blue Shield of Minnesota policy. If he stayed with Blue Cross, Remick said, his employees would have had to pay nearly $5,000 out of pocket before their health insurance kicked in. One of Remick’s 37 insured workers was already working overtime just to cover her portion of the insurance premium. “It’s impractical,” Remick said. “It made us go out and look at what else was out there.” What he found was Bloom Health, which uses a consumer-friendly website to market itself as the grocery store of health insurance shopping. The setup is simple: Employers give their employees a set amount of money to buy health insurance through Bloom. Bloom curates more than 3,000 individual health insurance plans and helps customers choose the one that best suits their needs. With Bloom, Remick was able to budget his health insurance spending. No more waiting for the insurance carrier to tell him how much he would owe next year. Now he pays between $150 and $425 a month per employee, depending on age. If he wants to increase the company’s contribution next year, he can. If not, he doesn’t have to. Bloom will help him figure that out. Remick says that his company is saving about half of the $38,835 that it was paying monthly for health insurance in 2011. He has shared a total of $8,000 with his employees. As for Blue Cross and Blue Shield of Minnesota? “I’m pretty sure they were happy to see us go,” Remick chuckled. “I was pretty certain they were going to send me flowers on the way out.”

PANACEA OR PANDORA’S BOX?
The 113 percent increase nationally in health insurance premiums over the past 10 years certainly makes the Bloom model look attractive. Set a price, get insurance companies to compete over individual employees—instead of whole companies of employees, as they do now —and let the market work its magic. Carl Cudworth, the director of benefits at Houghton Mifflin Harcourt, transitioned 700 retirees in 2011 from a Cigna Medicare supplemental plan to an insurance exchange run by Extend Health, which offers 189 unique supplemental plans. It was a success, he says, and if the health care law sets up a market where individualized health insurance plans are possible, he’ll consider expanding the model to his current employees. “If I had the opportunity to mirror what I’ve done with the post -65 retirees, that’s something we would have to look at. Any employer out there would have to look at that,” he said.

But, as always, there is a catch. Traditionally, employers have offered to cover a certain set of health benefits, in effect holding hands with their employees and jumping into the ever-rising pool of health care costs together. This exchange model could turn that agreement on its head. Instead of a package of set benefits—say an employer pays for 80 percent of health care costs and the employee picks up 20 percent—now the boss says, ‘You’re on your own. Here’s some money to help.’ In insurancespeak, it’s a shift from defined-benefit to defined-contribution health coverage. Of course, employers have made this shift before. Remember pensions? Now they’re 401(k) p lans. In 1985, 90 Fortune 100 companies offered retirees defined-benefit plans. By 2011, only 30 such employers offered pension plans, according to benefits consulting firm Towers Watson; the others had moved to 401(k) defined-contribution plans. “It’s a little more hand-holding and babysitting.” —Mike Remick of the Rochester Athletic Club, on transitioning employees to a defined-contribution plan. Advocates of the health care law are wary of Bloom and other private exchanges. Although the premise of insurance companies competing for customers by offering low-cost, high-quality plans is a linchpin of the state insurance exchanges set to begin operating under the law in 2014, private exchanges are not obligated to follow the same rules. “That’s one concern—whether the private exchanges [will] be selling plans that may be cheaper but have significant deficiencies,” said Timothy Jost, a law professor at Washington and Lee University. To be included in the state and federal exchanges, insurance plans will have to meet a fairly high bar. For example, the law requires insurance plans in the state and federal exchanges to offer “adequate” access to a network of doctors in the area and to follow rules about marketing their products. Another problem, Jost says, is the potential for private health exchanges to disproportionately attract healthy workers, leaving only the sickest and costliest people in the state and federal exchanges. That’s known as “adverse risk selection” in insurance lingo. “They always find ways to r isk-select,” Jost said. An insurance plan could fail to cover specialists who treat certain chronic illnesses, for example, ensuring that costly patients with those conditions don’t come to them for coverage. “There are quite a number of provisions in the Affordable Care Act intended to level the playing field, but it’s going to be hard for insurers to adjust to competing with each other on price and quality instead of risk selection. Private exchanges muddy the waters there a bit more,” Jost said.

UP, UP, UP
About 150 million Americans—57 percent of people under 65—get their health insurance through their employers. With premiums more than doubling from an annual average of $7,061 in 2001 to $15,073 in 2011, according to the Kaiser Family Foundation, that benefit costs employers plenty, especially in a down economy. One way they get those costs off their books is by shifting more of the insurance premiums to employees. Over the same time period, employers’ share of health premiums increased 108 percent, from an average of $5,269 a year to $10,944. But employees’ share rose even faster. Their average contribution increased 131 percent, from $1,787 in 2001 to $4,129 in 2011, all as the economy worsened. Employers are desperate for a way to predict—and ultimately restrain—ballooning health care costs. Defined-contribution health plans can be an attractive option. The idea has been around since the 1990s, but, so far, no major employer has moved its active employees into a defined-contribution plan. According to Paul Fronstin, director of the Health Research and Education Program at the Employee Benefit Research Institute, employers are interested but cautious. “When you talk to employers, you get a mixed reaction, depending on what department they’re in,” Fronstin said. Executives in charge of benefits, he said, don’t like touching health coverage. “They’re going to look at it and say they are going to be very hesitant. But that’s a benefits/HR perspective. A [chief financial officer] perspective is a different story.” That’s because defined-contribution plans allow employers to control costs. “They’ve done so with other benefits, and that makes it attractive financially. Ultimately, it’s who’s got the stronger argument within. Would I be surprised if [a big employer made the switch] in the next year or two? No. Do I know of anyone who has planned to do it? No.” Fronstin, who is working on a study of employer attitudes toward defined-contribution health plans, said that even when unemployment was as high as 10 percent, employers did not drop employee health benefits. The overall percentage of businesses offering coverage has hovered around 60 percent for 10 years,

according to the Kaiser Family Foundation, remaining largely impervious to the economic downturn. Employers are clearly afraid of messing with employee health insurance. It’s also hard to be the first company to make such a switch, Fronstin said. “Most emp loyers are not early adopters. They wait on the sidelines. They want to hear from other employers.” And, of course, another set of complications stem from the uncertainty surrounding the health care law because of the legal challenges now before the Suprem e Court and Republicans’ potential efforts to repeal it after the 2012 elections. “They are waiting to see what happens with [the] Supreme Court and elections … and the strength of the economy definitely plays a role,” Fronstin said. If the recovery keeps picking up, employers will hesitate to do anything to make themselves less attractive to job-seekers. In a December article for Bloomberg Businessweek, former Office of Management and Budget Director Peter Orszag cites economic pressures as one reason that he is “willing to bet $1 that most large U.S. employer health care offerings in 2020 will be defined-contribution plans.” Orszag argues that another big driver is, unexpectedly, Democrats’ signature health care law. That’s surprising, because defined contribution plans are typically thought of as a Republican idea. Many conservatives believe that restoring consumer power and, therefore, market sensibilities, to the health insurance market will push down costs. Democrats, especially those toward the left end of the spectrum, view defined-contribution plans with a suspicious eye. Topher Spiro, who helped write the health care law as a staffer for then-Sen. Edward Kennedy, D-Mass., and is now the managing director of health policy with the left-leaning Center for American Progress, said that when businesses set finite dollar amounts for health insurance, that decision “shifts the risk of rising health care costs to employees.” But Orszag says that the state insurance exchanges established under the health care law could help this insurance structure bloom (pun intended). “If most employers do retain their health plans, the state insurance exchanges created under the new federal health care law will make the basic idea of a definedcontribution health plan more prevalent, and thus may speed its adoption,” Orszag wrote. In other words, once exchanges begin operating throughout the country in 2014, companies will have a place to send their employees, along with a check, to find health insurance, a potentially costly and confusing endeavor. In fact, employees’ fears about having to find health insurance plans on their own is another big reason why defined-contribution plans haven’t taken off, says Gary Claxton, the director of the Kaiser Family Foundation’s Health Care Marketplace Project. “The reason employers offer coverage now is that they want to attract workers,” Claxton said. To switch to defined -contribution, “they would have to believe the workers they have would be satisfied going into an exchange and would view that as a good option.”

A GROCERY STORY FOR INSURANCE
Jane Hein, who has been the group-exercise director at Rochester Athletic for 12 years, is one of Mike Remick’s employees who moved onto a defined-contribution health plan this year. When the staff met last year to talk about switching to Bloom, the expected grumbling ensued. “There was some dread going into it,” Hein said. “But I have to say, my observation of the staff coming out of the meeting was: ‘This makes a lot more sense.’ ” Bloom representatives at the meeting explained how the system worked and then met with individual employees who had questions. Hein said she is paying “slightly” more than she did under the company’s Blue Cross and Blue Shield plan, because she wanted to keep her current doctor in her network. But as Remick reminded her, it is significantly less than the 38 percent hike that Blue Cross and Blue Shield had offered for 2012 coverage.

Choosing her plan was easier than she thought it would be, Hein said. She needed a plan that would work with a health savings account, and she was able to use the website to filter through available plans for those with HSAs. “There are hundreds of plans, and that could’ve made it really overwhelming,” Hein said. “But when I looked at the differences between the plans, it was very clear what the deductibles would be, what is covered, whether it was major medical, if there was pharmacy support, if pharmacy wasn’t in cluded. It was very clear and wellspelled out for each one of the plans. So I knew exactly what I was picking.” As far as growth goes, Bloom Health is living up to its name. In one year, the company literally blossomed, from covering 21,000 people in 2011 to a projected 300,000 by the end of 2012. CEO Abir Sen expects the growth to continue. Defined-contribution health plans have been on Sen’s mind since he started his career at Deloitte Consulting, but he says that a convergence of three factors got Bloom off the ground: the economic recession’s pressure on employers to cut costs, the rise in health care costs, and the 2010 health care law. His analysis matches Orszag’s. “Bloom is a responsible way for an employer to move to defined -contribution,” Sen said. “Employers could just cut you a check today and say, ‘Good luck,’ but people have no experience to navigate on their own.” Bloom works with employers to figure out how much they can pay per employee, typically increasing premiums as employees get older and if people choose to cover their families. At Rochester Athletic, for example, the company provides $150 a month for employees ages 20 to 29, and $375 a month for those who want to cover a spouse and children. Those numbers increase by five- and 10-year age brackets until they reach $425 a month for individual employees over 60 and $787.50 a month for a 60-plus employee with dependents.

Employees at the Rochester Athletic Club switched to a defined-contribution health insurance plan this year. “There was some dread going into it,” one worker says. The company puts the employees’ money into a Bloom “account” and they log on to Bloom’s online exchange to spend their money as they choose. Bloom says it can help workers figure out what they want; employees are free to spend more or less than their employers allot them. They keep the savings or cough up the extra money to cover their selected plan. Bloom takes a cut from both employers and insurers, charging fees on a per-employee basis. As for Democrats’ concerns that defined-contribution plans shift the cost risks to employees, that is arguably true in the Bloom model thus far. According to Bloom, 69 percent of employees in their exchange select a plan that comes with a health savings account. That typically means the employee is paying more money out of pocket before insurance kicks in, sometimes thousands of dollars more, than someone in a traditional health-maintenance organization or preferred-provider organization. The HSA allows the employee to save for those costs that insurance doesn’t cover. The number of Bloom plans with HSAs is almost 20 percent higher than the average of high-deductible plans for companies with fewer than 200 employees. According to the Kaiser Family Foundation, 50 percent of business with fewer than 200 employees offered health insurance plans that had a deductible of $1,000 or more in 2011. But in exchange for that cost exposure, Bloom says, its average premiums were 18 percent lower than the overall 2011 average, at $4,500 a year for a single employee.

In responding to criticism that Bloom’s health insurance plans don’t cover as much as traditional plans, Sen says he merely wants people to be able to spend their money how and where they want. “Over time, it really puts the pressure on insurance companies to really compete for the consumer,” he says. “The way they behave when they are competing for the HR business partner—having a really great relationship with them—really doesn’t mean anything to the consumer.” Most of Bloom’s rapid growth is coming from setting up new exchanges for some of America’s largest health insurance companies. In September, the Health Care Service Corp., Blue Cross Blue Shield of Michigan, and WellPoint bought majority stakes in Bloom, rocketing the formerly regional company into the national spotlight. Bloom is building insurer-specific exchanges for these companies, so that they can offer their products — and their products alone—to interested employers. Sen compares it to store-brand products. If Bloom is a grocery store of health insurance plans, the insurer-specific exchanges are like grocery stores that sell only their own products. But doesn’t that ruin the competition aspect? No, according to Sen. “If a company feels more comfortable offering only Blue Cross Blue Shield products, it will find a way to make that happen. My view is, the fundamental reason why we have a business model that works is that the employer wants to have cost certainty of health insurance costs. The other stuff is a byproduct,” Sen said. “We have to figure out how to make it attractive to the employee. It can’t be ‘Company ABC is a terrible place to work because their benefits suck.’ ”

IMPACT OF HEALTH CARE REFORM
Under the health care law, by 2014 employers with 50 or more workers need to offer insurance plans that cover at least 60 percent of the “actuarial value” of a plan’s benefits—meaning, 60 percent of the out-ofpocket cost of doctor visits, hospital visits, drugs, and services —or risk paying a fine. Employees pick up the other 40 percent. What is yet to be determined in the morass of new health care regulations is what those benefits must be. Or as Fronstin puts it: “60 percent of what, exactly?” If the final rules say that employers need to cover 60 percent of one doctor’s visit, that’s much cheaper than covering 60 percent of a comprehensive health insurance plan. Also unclear is how an employer will know or prove that it is providing 60 percent of a plan’s actuarial value. When it comes to private exchanges, will giving an employee the money to purchase a plan that is 60 percent of the actuarial value of the company plan fulfill the requirement? Washington hasn’t said yes or no but is widely expected to give the OK. Another vital piece of the health reform law for defined-contribution plans is the provision forbidding insurance companies from denying people coverage if they are already sick. Bloom works in Minnesota because it has an “insurer of last resort” that will cover anyone, regardless of any preexisting conditions, for a higher cost. Bloom works with employers to figure out how many people will need the expensive lastresort coverage, and allots them additional money. “There are some states where there are no high -risk pools. We just couldn’t go to those states,” Sen said. The congressional authors of the health reform law didn’t entirely dismiss the idea of defined contribution plans—the law did create the state-based exchanges, after all. States can even choose to set up a separate exchange for small-business employees. Those who support the law would prefer that

coverage is tied to a percentage of a plan’s benefits rather than a hard dollar figure. Spiro points to the way federal employees get their health insurance plans. The government picks up about 70 percent of the tab for a benchmark plan and lets employees shop on what might be one of the first insurance exchanges in the country. “I think that defined-contribution can mean simply that the employer sets or defines its contribution toward health insurance and then lets the employee shop and choose among a variety of plans,” Spiro said, “rather than being stuck with the one plan that the employer chooses.”

THE AON HEWITT MODEL
Aon Corp. is already testing a middle ground between the Bloom model and federal-employee plan. Starting this year, Aon put its own employees on an exchange, which offers health insurance at four different levels. Bronze-level plans cover 60 percent of costs, for example, while platinum plans cover 90 percent. Aon Hewitt, the human-resources subsidiary of the parent corporation, is working to get other national employers to join its exchange, with an aim of covering 500,000 people by 2013. In Aon’s exchange, the company told employees what it would pay and invited insurance companies to compete for the business. Two carriers signed up—Blue Cross Blue Shield and United Healthcare—and offered a total of eight plans. Aon Hewitt employees signed up for the plans at the end of 2011. “The reason the defined-contribution hasn’t worked in the past is that an employer sets a fixed subsidy and says, ‘This is how much I’m going to pay,’ and very quickly gets pushback from empl oyees who have to deal with astronomical increases,” said Kenneth Sperling, the head of Aon Hewitt’s exchange. Aon’s plan is different because it puts the employers in charge of the exchange, acting as a gatekeeper to vet different insurance carriers’ plans to make sure they are good enough for their employees. The technology to curate and manage insurance plans through user-friendly, online exchanges has been a driving force behind the health insurance market’s shift toward defined -contribution plans, Sperling says. “What the exchange does is move to defined-contribution into a marketplace that works. It is not definedcontribution that is driving the exchange.”

WAVE OF THE FUTURE?
Technology might be making exchanges easier for employees to use, but learning how to pick insurance coverage is still a challenge. Company officials at both Rochester Athletic and Houghton Mifflin Harcourt said that explaining the process was one of their hardest tasks. After all, how many people have put a lot of thought into deductibles versus coinsurance? And when your options for insurance plans number in the hundreds or thousands, it takes a lot more work to figure out the best fit. When Houghton Mifflin Harcourt moved its retirees to a defined-contribution, supplemental Medicare insurance plan, Cudworth said, getting the word out was tough. “We joked our unofficial slogan was: No retiree left behind,” he said. “I don’t want to minimize the communication challenge. It was a lot of work to get our retirees on board. But if they can understand it, it should not be any harder to have active employees get on.” At Rochester Athletic, which transitioned employees to Bloom Health plans at the start of this year, one employee still hadn’t signed up for his coverage in February. “Part o f the frustrating piece was, you need them to take the action, and it’s a little more hand -holding and babysitting,” Remick said. “It was putting the control to the employee, which has been good and bad. It’s good for the education portion for them,

which is huge, I think. Before, all they had to do was sign up for it.… Now, there’s a lot more vested interest, a lot more research done.” Hein agrees with that sentiment. In addition to being the group-exercise director at Rochester, she’s also a registered physical therapist, so she was more familiar with insurance terminology than some of her colleagues. “I found myself being a confidant—helping people,” Hein said. “I understand the jargon, so I was able to interpret a lot of information,” she added. “A lot o f people had not really thought about their insurance.… Going through this process definitely made the average individual understand more about your own responsibility—having a good comprehension of your medical benefits and being an independent advocate.” All of that research could make people more comfortable with one of the most contentious health care plans out there: House Budget Committee Chairman Paul Ryan, R-Wis., has proposed turning Medicare into a voucher program, where private insurance companies compete on an exchange for their business. The criticisms of defined-contribution plans and Ryan’s vouchers are similar. Both shift the risk of ever growing health costs from the employer or the federal government to the individual. That idea is still foreign to most people who have employer-sponsored insurance. But growing familiarity with definedcontribution-plans and insurance exchanges could make the prospect of getting Medicare coverage the same way much less scary. Defined-contribution health insurance plans may be coming soon to a paycheck near you. But whether pitting insurance companies against one another to attract the individual customer will be better at containing health care costs is the million-dollar question. In the quest to bring down health care costs, it’s safe to bet that nothing is that simple. CLARIFICATION: The article has been updated to reflect that Bloom Health expects to cover 300,000 people by the end of 2012.

This article appears in the March 10, 2012, edition of National Journal.

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