www.gallagherbenefits.com

Health Benefit Cost Containment:

Controlling the Uncontrollable

David Carrell, REBC, CLUArea Senior Vice President

dave_carrell@ajg.com

www.gallagherbenefits.com

Agenda

• History of Health Benefit Costs

• Cost Drivers

• Who’s to Blame?

• Funding Strategies

• Strategies for Cost Containment

• Role of Benefit Cooperatives

History of Health Benefit Costs

Ten Years of Trend

What’s Driving Cost Escalation?

• Technology/Research

• Cost shifting – Government programs/uninsured

• Malpractice premiums/defensive medicine

• Health Care Professional – Wages and Benefits

• Consumer behavior – “I want it all, I want the best, I want it now and I don’t want to pay for it!”

• Waste/Inefficiencies/Fraud

• State mandated benefits

• Aging Population

What’s Driving Cost Escalation?

Average Life Expectancy

Who’s to Blame?

?

Who’s to Blame?

The Perception:• Those ^&$^#@&*&*$ greedy insurance companies

and their %$%#%^^#@%^& high-paid executives!

Not Really:• “Insurance company profit margins, have been running

at 6 to 7 percent”New York TimesMilt Freudenheim“Cost of Health Insurance Rises

Again, but at a slightly slower Rate”September 12, 2007

Who’s to Blame?

• Consumers• Employers• Consultants• Health Care Providers• Insurance Carriers• Lawyers• Politicians

The Reality:

Funding Strategies

The proper choice of funding vehicle is integral to the cost-containment process but is not itself, a cost containment devise.

Each funding vehicle must account for the components of health benefit costs; claims, expenses and incurred claim liability.

Fully Insured

• All risk assumed by carrier

• Renewal rates determined by carrier

• Employer’s claim experience blended with carrier’s book of business

• Fixed expense components based on retention formula-Not actual costs

• Normally no refund of excess premium in favorable claim years

• Deficit incurred in one year may impact future years

• Flexibility in plan design limited by carrier

• Rule of thumb: Applicable to groups under 500 covered employees

Partially Self-Funded

• Most risk assumed by employer

• Specific stop loss purchased to mitigate impact of catastrophic claims

• Aggregate stop loss purchased to mitigate impact of unforeseen claim frequency

• Renewal rates determined by employer

• Excess “premiums” (surplus) remains in fund

• High level of flexibility in plan design

• Rule of thumb: Generally applicable to groups of 500 + covered employees

Strategies for Cost Containment

“We will either find a way, or make one.”Hannibal

Cost Containment Tools

• Short Term

– Raise deductibles, copays, out of pocket limits

– Increase employee contributions

– Terminate Plan/Cash equivalents to employees

Cost Leveraging Illustration

Year Claim Cost

Employee Share

Increase over 1st year

Plan Share Increase over 1st year

1 $5,000 $725 N/A $4,275 N/A

2 $5,550 $780 7.6% $4,770 11.6%

3 $6,161 $841 16.0% $5,320 24.4%

4 $6,838 $909 25.4% $5,929 38.7%

5 $7,590 $984 35.7% $6,606 54.5%

Assumptions: $5,000 medical claim, $250 calendar year deductible, $1,000 out of pocket limit, 90/10 coinsurance, 11% annual trend

Cost Containment Tools

• Short/Long Term

– Employee Assistance Plans (EAPs)

– Disease Management

– Consumer Directed Approach-HSAs or HRAs

– Transform “Defined Benefit” to “Defined Contribution” (Taft-Hartley approach)

Cost Containment Tools

• Long Term

– Education (newsletters, websites, “lunch and learns”

– Sponsor/Fund Wellness programs (Diet, exercise, stress management, smoking cessation, etc.)

“Everybody wants to go to heaven but nobody wants to die.” Loretta Lynn

Wellness Initiatives

• Why wellness?

– The least expensive claim is the one that doesn’t occur.

– Worker’s Comp risk is universally managed; Why not employee health risk?

Wellness Initiatives

• What is wellness? No single definition.

– Worksite wellness screenings

– Disease management

– Plan design provisions ( adult/child well care allowance)

– Lifestyle modification

Wellness Initiatives

• Is wellness worth the investment?

– Depending on employee participation level, ROI varies from 5:1 to 20:1 (1)

– Worker productivity: Reduce absenteeism by 2%, Increase productivity by 9% (2)

– School district turnover is traditionally low. Intervention early in employees’ careers yields ROI to sponsoring district

(1) Source: Proof Positive: An analysis of the Cost-Effectiveness of Worksite Wellness, Summex Health Management, Sixth Edition, 2006(2) Source Pelletiuer B, Boles M, Lynch W. 2006

Wellness Initiatives

What are the wellness initiative basics?

• Develop a strategy. Employ professional wellness firm.

• Establish measurable goals. Use medical plan utilization data for baseline

• Identify health risks. Rx data, on-site wellness screenings, health risk appraisals

• Develop intervention programs for different groups:– Healthy Population: Exercise, nutrition, lifestyle modification

– At-risk Population: Exercise, nutrition, lifestyle modification/lifestyle coaches – Chronically Ill Population: Above + disease management specialists

• Modify according to participation, measurable results

Cost Containment Process

“One who attempts nothing will probably achieve it.” Anon

“Doing nothing is very hard to do…you never know when you’re done”

Leslie Nielsen

Step 1

• Engage the Stakeholders via Advisory Committee

• Duties and powers of Committee should be clearly defined.

• Committee makeup should include representatives of employee constituent groups, other stakeholders

• Outspoken, opinionated members; not whiney

Who are the Stakeholders?

• Employees

– Certified and non-certified– Male and female– Young and “more mature”

• Administrative Personnel

• School Board Members

• Taxpayers

• Define Fundamental Goals of the Plan

• Examples:

– Better balanced package (medical, dental, life, disability)

– Cover “big ticket” costs

– Emphasize disease prevention

– Encourage/Reward healthy lifestyle initiatives

Step 2

Step 3

• Dissect current programs to determine how well they match-up with Plan Goals

• Example: If employee wellness is goal, are there sufficient incentives in place to encourage high levels of participation?

Step 4

• Rebuild benefit program in the image of the Advisory Committee

“If you don’t change your direction, you might end up where you’re going.”

Anon

Step 5

Identify and record baseline data related to program changes:

Examples: Claim $/employee

Top 10 disease categories

Generic vs brand name Rx utilization, etc.)

Step 6

• Develop implementation strategy; short and long term

– Determine what can be realistically implemented in one, two or three year periods.

– Consider impact of:

Employees’ natural resistance to change

Communication needs

Vendor support.

Step 7

• Begin implementation process via group meetings

• Allow minimum six months prior to effective date of program changes

• Assume big pushback from rank and file

• Lead with rationale for program redesign. Use “gap analysis” to show impact of inaction on paychecks, retirement

• Enlist committee members to make case to their constituents

• If feasible, tie future compensation, benefits to success of plan

Step 8

• Implement program. Prepare for:– Lots of questions– Confusion– Complaints– Finger-pointing

• Make sure vendors and consultant and committee members committed to support implementation phase

Step 9

• Meet quarterly with Advisory Committee to:

– Monitor

– Measure

– Modify

• The benefits marketplace is dynamic (HRAs, HSAs, teledocs, on-site clinics/pharmacies). Keep Committee members up-to-date on new developments.

Benefit Cooperatives

“All for one and one for all” Alexandre Dumas

Role of Benefit Cooperatives

• Benefit Cooperatives are formed to better contain costs by:

– Sharing risk with other comparable size groups with common interests

– Creating greater purchasing power and access in the insurance marketplace

– Employing advantages of self-funding at a reduced risk to individual cooperative members

– Gaining greater flexibility in plan designs

– Create a forum for exchange of information among coop members

How Do Benefit Cooperatives Control Costs?

• Aggregating claims of all coop members flattens out “peaks and valleys”

• Fixed costs of administration spread over more lives produces lower costs per employee

• Greater credibility of claim experience (Law of Large Numbers) allows coop to assume greater risk and lowers cost of stop loss insurance

Benefit Cooperative- Typical Financial Structure

Member Units’“Premium $”

Cooperative’s Fund

Interest Earned on Cash Flow

Fixed Costs $ TPA Administration’ Reinsurance EDP, Reporting Systems Utilization Review Actuarial Consulting Banking Communication Material

Claims $

$$ $$$$

$$

$$

Typical Benefit Cooperative Governance

• By-laws

• Board of Directors

• Executive Committee

• Advisors (non-voting)– Benefits – Accounting– Legal

Questions?

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