According to the U. S. Chamber of Commerce, health insurance is the most expensive single benefit for U. S. employers.  A recent survey showed that employers spent 10.5% of their payroll, or $4,800 per employee, on health care.  Although that figure may be a little high for Knoxville law firms, I believe most of us can testify to the fact that medical insurance has been the fastest increasing expense for our firms over the past several years.  The cost of health insurance nationwide has increased on the average of 20 to 30 percent over the past two years.  By the year 2008, premiums are predicted to double.

At the same time health insurance premiums are rising, employees have become disenchanted with managed care and many are possessed by a sense of entitlement.  They regard the best health care money can buy as their inalienable right.  Employers are no longer willing to foot the bill, but at the same time we must remain competitive in providing good benefits in order to recruit and retain topflight employees.

Having just gone through the trauma of renewing our firm’s group medical insurance coverage, I thought that I would share some of what we learned and offer some suggestions about what can be done to help control this cost.

I consider our firm to be a relatively healthy group.  We have been blessed not to have any catastrophic illnesses.  Yet, when we received our renewal rates in June, they represented a 56.1% increase in premium.  I had heard about rate increases in the 20% to 30% range, and I was prepared for a double-digit increase, but I never anticipated this.

Due to privacy issues, health insurance providers will not furnish information regarding claims.  In our case, the insurance company rationalized the increase as follows:

(1)        A change in SIC codes:  No one could tell me what SIC stands for, but it apparently has to do with an industry rating of the risk.  According to our insurer, they have apparently concluded that law firms are not as a good a risk as we were a year ago.  If your policy has not already renewed this year, get ready for a 15% rate increase on this factor alone.

(2)        Age and sex:  We are all a year older.  Hiring younger employees is not necessarily the answer.  Women of childbearing age are a higher risk.

(3)        Loss ratio:  Insurers claim that they break even with a loss ratio between 70% and 80%.  They will tell you what your loss ratio is, but they won’t provide specific information to back up their figures.

(4)        Pharmacy trend:  This is the big one.  According to insurers, not only is the cost of drugs increasing, but also there has been an increase in use of prescription drugs over the past few years.  There is almost an epidemic in drug use, and according to one source, Tennessee leads the nation on a per capita basis.  The cost of prescription drugs is increasing 2 or 3 times the normal inflation rate.  Drug companies are well represented by lobbyists, they are spending an all time high on advertising and they are using legal loopholes to delay generic competition with their products.

A few years ago, there was a greater market of insurers and we could shop the market for competitive quotes.  Several of those insurers have now pulled out and currently there are fewer companies writing health insurance coverage for small groups in East Tennessee.  Those companies are reluctant to take on any new business for less than a premium price.  If your firm has much in the way of health history, competitive quotes may not be a viable option.

So what are we to do?  It’s not possible for lawyers to increase hourly fees at the same rate medical insurers are increasing their premiums.  With other overhead costs increasing all around us, most lawyers are not willing to absorb the large increases associated with providing this benefit to their employees.  There are only two other options: maintain the same level of coverage and have our employees pay part of the premium, or reduce the level of benefits.  Neither option is desirable, but the most palatable is a reduction in benefits, which results in the people who use the coverage most often absorbing more of the expense.  Here are some suggestions:

In our case, we were able to reduce the premium increase from 56.1% to 1.62% by implementing some of these changes.  That takes care of this year, but what about next year and the years after?  Something’s got to change.  Some of us remember the days of the indemnity policies.  Then came some radical changes in the medical insurance industry in the form of managed care.  PPO’s, POS’s and HMO’s are now prevalent.  For the most part, indemnity policies are a thing of the past.  What’s on the horizon?  According to one expert, “the current programs are good for a couple more years, but not much beyond that.  In five or ten years, we’ll need to have a substantial paradigm shift”.  We are at a crossroad, but it is unclear what the next phase may look like.  Large employers, who have more leverage, are experimenting with direct contracting with medical providers.  Some smaller and midsize companies are banding together in purchasing coalitions.  I’m not sure if that would work for Knoxville law firms, but it’s worth looking into.  In an informal survey, I found that several of our law firms are insured by the same company.  Other employers are offering employees a “defined contribution” in the form of a voucher or cash with which they can purchase health care on their own.  That option is completely out of sync with the needs of most of our employees.  It eliminates what little leverage we have as a group and employees with a medical history would have a difficult time finding suitable insurance coverage at an affordable price.  And some employees may choose to pocket the cash and take the risk of going uninsured.  Some large companies are offering their employees the “next generation of healthcare coverage” known as consumer-directed health plans.  Employers allocate an annual amount to spend on medical expenses, and employees use those funds to pay for medical care.  Once employees have spent the funding in their account, they must pay out of pocket for healthcare service until they reach an annual deductible.  At that point, a traditional health plan kicks in to provide coverage.  To be effective, employees need to be educated about healthcare cost drivers and they will need to make significant shifts in how they think about healthcare spending.  The theory is, if people think it’s their own money they are spending, they are not going to spend it as much.

The traditional way we have all bought medical insurance in the past is no longer very effective.  We get notice of our renewal rates thirty days before the expiration of our current policy, and we make hasty decisions about what to do.  We need to be thinking and planning 2 years in advance and working on ways to reduce the cost of medical insurance by reducing the need for medical treatment.  If insurance companies are paying out more than they are bringing in, they are going to continue to charge higher premiums.  So we need to figure out a way to stay healthy and reduce claims.  The long-term solution for rising health care costs must include employee accountability.  Employees must be encouraged to manage their individual health.  We need to educate our employees on disease control and staying healthy.  One local organization that assists employers in this area is HealthCare 21.  It was formed about 5 years ago by a coalition of employers including TVA, Pilot Corporation, the City of Knoxville and Knox County Government.  It is currently made up of 115 members, including employers and health care providers, in the Knoxville, Chattanooga and Cleveland area.  It is a non-profit organization whose purpose is to improve the quality of health care through a combination of price, service and quality.  Visit their web site at www.healthcare21.org, or call them at 292-2121 for more information.

There’s no easy answer.  Be prepared to address continuing premium increases in the near term, expect changes in the industry in the long term and start planning now on ways to reduce your costs by reducing the need for medical care.

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