The Escalating Expense of Health Care

Charities explore new ways to stem spiraling insurance premiums

When Frank Ross met with his charity’s insurance representative three years ago, he was greeted with some distressing news.

Mr. Ross’s small social-services organization, Elm Acres Youth and Family Services, in Pittsburg, Kan., faced a 54-percent increase in its health-insurance premium.

The cost rise prompted Elm Acres to make some big changes in the health coverage it offered to its 50 employees. The organization eliminated its dental-insurance plan and increased the payments that employees were required to pay for their care.

The moves helped slash the increase roughly in half. But the increased premiums and payments sliced into employees’ take-home pay and squeezed the organization’s already tight budget, which is less than $4-million annually.

Each year since, Elm Acres has been hit with additional large increases — a trend that shows no sign of subsiding. And while it has since found a way to restore dental coverage, Mr. Ross says he worries about what his organization will have to do if premiums continue their rapid rise. “I’m afraid of what will happen if we don’t find some way to curtail the spiraling costs,” he says. “Down the road, the choices will probably be more difficult.”

Rising health-insurance premiums are forcing nonprofit organizations and other employers across the nation to make similarly tough choices. Last year, the average health-insurance premium for all employers rose by 13.9 percent, according to a national study released in September by the Henry J. Kaiser Family Foundation, in Menlo Park, Calif. The increase, the largest since 1990, marked the seventh consecutive year of such rises, according to the study.

Many nonprofit organizations have been too slow to deal with rising insurance costs, which are rapidly chewing up annual budgets and leading to discord between employers and their workers, says Stephen J. Repka, president of Advanced Benefit Strategies, in Hartford, Conn., which manages health-insurance plans for more than 100 nonprofit employers in the Northeast.

“The biggest problem nonprofits have is they’ve looked at [health-insurance costs] year to year,” he says. “The first thing we have to do is get out of the habit of thinking short term.” For example, he says, if an employer’s premiums rise at an annual rate of about 15 percent, that organization can expect to see its health-insurance premiums double in just five years — and quadruple over the course of a decade.

Nonprofit organizations that seek solutions to spiraling costs are faced with a growing number of options to help them better manage their health plans, he says.

Some organizations have made the move to self-insurance — cutting ties with traditional insurance companies and managing their own coverage. Others have purchased high-deductible plans that come with so-called flexible spending accounts for employees. Under these plans, money that was once earmarked for premiums is given tax-free to employees, who can use that cash to pay for office visits, prescriptions, and routine surgeries. A minimum amount of coverage is picked up by the nonprofit organization to cover catastrophic illnesses or major surgeries.

Still other employers use a combination of plans to help manage their costs.

But while no single answer fits every employer’s needs, all of these options share one common trait: They will lead to employees taking on more of the cost for their health insurance. “Unfortunately, more is being put on the employee,” says Mr. Repka, “because the employer can’t afford it anymore.”

Seeking Answers

The reasons for the increases in health-insurance costs for businesses and nonprofit groups are varied. Prescription-drug prices are skyrocketing as Americans consume a record number of pills. Medical-malpractice insurance premiums are rising, prompting many physicians and hospitals to raise their costs to keep pace. An aging population and improved science are leading to more people needing treatment and more ways to prolong life.

Large for-profit corporations have been moving quickly to deal with the increases by seeking alternatives to traditional health plans. The Kaiser study found that 17 percent of companies with 5,000 or more workers have already switched to high-deductible plans — those with annual deductibles of more than $1,000 for single coverage. By comparison, only 5 percent of all employers with a work force between 3 and 4,999 workers are offering high-deductible plans.

Nonprofit organizations across the country are also exploring creative solutions. Some have dropped secondary employee benefits — such as vision, disability, and life insurance — to help cover their primary health-insurance costs. A small but growing number of charities are also taking a look at “first-dollar” coverage, which can save some organizations as much as 25 percent on their premiums, according to Meredeth Clark, president of CAN Insurance Services, in Capitola, Calif., a subsidiary of the California Association of Nonprofits that helps more than 800 nonprofit groups in the state select and administer health-insurance plans for their employees.

Under a first-dollar plan, the insurance company pays for all of an employee’s costs under a certain threshold, usually $500 or $750. If the employee spends more than that amount, he or she is responsible for the next $2,000 to $3,000, depending on the plan. The insurance company then picks up any cost above that second level.

First-dollar plans are particularly popular among employees who are healthy and are unlikely to generate substantial health-care costs, Ms. Clark says. The plans also allow workers to roll over money that isn’t used from year to year: For example, a participant with a $750 threshold who only needs $250 worth of care in a given year can apply the remaining $500 toward the next year’s threshold.

To date, only a handful of CAN Insurance Services’ clients have enrolled in first-dollar plans, largely, says Ms. Clark, because they are still relatively new. It is too early to tell whether the plans will offer a long-term cost savings or merely short-term help, she says.

In addition, she cautions that the plans end up carrying a high cost for workers who have chronic health problems or year-round prescriptions since, on top of their basic premiums, those workers must also pay up to $3,000 a year in out-of-pocket costs.

Self-Insurance

The United Way of Central Alabama is taking an even more radical approach to the health-insurance challenge.

The breaking point for the organization came in 2001, when its insurer came to the organization proposing a 46-percent increase in premiums. The United Way, which offers group health insurance to its member organizations in the Birmingham area, decided it could no longer keep up with the insurer’s rapidly rising rates. It decided instead to self-insure.

The move is risky since the United Way, rather than an outside insurance carrier, assumes all of the health-care costs for the 1,500 employees and 2,600 dependents from 43 organizations that are enrolled in the program.

In one year alone, the organization had to cover the cost of five catastrophic illnesses — well above the average for a group its size. As a result, expenses rose more quickly than originally expected.

But rather than having an outside bureaucracy determine the rules for its health-insurance plan, the United Way can decide what gets covered and what doesn’t, says Ellyn Grady, the United Way of Central Alabama’s senior vice president for agency impact. “It’s taking something we take for granted and putting it in our own hands,” she says. “What this gives us is more control.”

It also creates more work. The United Way has hired two employees, one full time, devoted solely to managing its health-insurance plan. The organization has also hired a consultant that monitors industry trends and offers advice on how to manage the plan. The consulting company is paid $1 per month per employee covered and received a commission for setting up the United Way’s plan.

In spite of these costs, the United Way has substantially slowed the rate of cost increase for insuring its employees, says Kelly L. Carlton, the group’s chief financial officer. Heading into its fourth year of self-insurance, the United Way is just now paying what it would have paid to its former insurer had it stayed the course back in 2001.

“It has worked out well for us,” Ms. Carlton says. “There’s no telling what they would have increased our premiums to if we had stuck with our existing plan.”

More often, larger organizations decide they are better off sticking with traditional insurance plans than diving into self-insurance. For instance, the Lahey Clinic, a research facility and hospital in Burlington, Mass., looked into self-insurance for its 4,400 employees who are eligible for the benefit and determined that it should continue to offer its menu of traditional plans, says Ron Bradley, the clinic’s vice president of competitive benefits.

The Lahey Clinic has faced annual premium increases of 10 percent or more this decade, but has opted against passing on a significant portion of those increases to employees.

Instead, it has made minor changes, such as increasing payments employees make for prescription drugs and encouraging workers to participate in lower-cost health-maintenance-organization plans. Those who choose to enroll in higher-cost plans pay a higher premium.

But rising health-insurance costs have pushed the clinic to make other sacrifices, Mr. Bradley says. “Because we’re a health-care organization, health insurance is a very important benefit,” he says. “To preserve that, we’ve had to make choices. We’ve certainly limited salaries. We’ve not added new benefits.”

Making Sacrifices

For an increasing number of nonprofit groups, rising costs are forcing them to drop coverage altogether. A survey released in November by the Kansas Non Profit Association showed that 239 of its 500 respondents — or 47.8 percent — don’t offer health-insurance coverage to their employees. Of the organizations that don’t offer insurance, 16 percent said they had dropped coverage during the past two years.

For some groups, particularly smaller organizations, health insurance has never been cost-effective. For many others, it has become a benefit they can no longer afford to keep, says Herb Callison, the association’s executive director. “Most of the agencies that indicated they couldn’t afford it are the smaller ones,” he says.

With that in mind, Mr. Callison’s organization is pushing state lawmakers to give it permission to solicit bids to hire a health-insurance carrier to provide coverage to uninsured workers. Without such coverage, many employees simply have no options. “It’s certainly an issue in attracting employees,” he says. “I think they are encouraged to go to work for a for-profit or somewhere where they offer insurance.”

When the Community Foundation of Westmoreland County, in Greensburg, Pa., expanded its staff from two to three recently, the fact that it did not offer a health-insurance plan made it difficult to land its desired candidate.

The foundation is too small to buy insurance on its own and would need to have five employees to participate in a plan offered by a local chamber of commerce, says Bobbi Watt Geer, the foundation’s president.

Instead, it offers a flexible-spending plan to employees, who can use the money in the plan to buy insurance on their own. “That’s been a little bit of a saving grace because I probably wouldn’t be able to employ anyone,” Ms. Watt Geer says.

Meanwhile, workers who have insurance are watching their contributions cut into their paychecks. During the past three years alone, the amount of the premium employees pay for family coverage has increased nearly 50 percent, from $1,619 to $2,412, the Kaiser study found.

Large organizations, such as Children’s Memorial Hospital, in Chicago, have had to balance their recruiting and retention needs with a desire to contain rising costs. Because of the strong demand for qualified health-care workers, the hospital fears it would suffer recruitment woes if it trimmed its insurance coverage, says Ellen Vebber, its director of compensation and benefits.

Instead of cutting services, last year it changed the way it finances its insurance.

Employees are now asked to pay a $400 deductible per family for the hospital’s high-end insurance plan, and to pay 10 percent of any medical costs incurred above the deductible. Previously, Ms. Vebber says, the plan offered 100 percent coverage with no deductible. In addition, the hospital has begun partially financing the risk for its health-maintenance-organization plan, and raised the amount employees must pay for prescription drugs.

Despite these changes, Ms. Vebber says, the 3,300-employee hospital saw its premiums rise 11 percent for the current year.

Navigating the Future

As insurance costs keep rising, Mr. Repka says he is advising his clients to avoid making too many tweaks too fast, since employees may not respond well to significant changes to their health-insurance packages.

“It’s better to make small changes every year than to make one major change,” he says.

Before jumping into alternative plans, Mr. Repka suggests that organizations simply find ways to offer employees several options, then let the participants choose which plan suits them best.

“You let the employee choose which plan they want and pay more for more coverage and less for less coverage,” he says.

That flexibility is particularly important since none of the existing options will fit every organization or every worker, says Ms. Clark.

“I don’t think anyone has come up with a great solution for what they can do with health insurance,” she says. “I spend a lot of time thinking about it, but I don’t know the answer. I wish I did.”

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