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FIGHTING TO HOLD DOWN BENEFIT EXPENSE

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With health care cost trends pointing upward once again, many savvy employers are examining the latest "treatment" options to keep their medical expenses in check.

Some employers are negotiating deals with health insurers to spread the risk more evenly across plan types so that managed care savings better offset indemnity plan costs.

Other employers have begun outsourcing health benefit administration to cut their overhead, while others also are using consultants to handle purchasing and negotiations.

Still other employers are taking the risk away from capitated managed care providers by self-insuring their health maintenance organization costs.

Although employers have enjoyed four or five years of favorable health care cost trends, benefit managers can't afford to fall asleep at the wheel, experts warn.

"Benefit managers need to stay on top of things," said Emily Twanmo, a director in the MEDSTAT Group's national practice team based in Ann Arbor, Mich.

She compared health care purchasing by employers to a game of musical chairs.

"If you're kind of walking around not paying attention, you could be without a chair when the music stops," she said.

And just as employers differ, so, too, will their solutions, said Alex Chernoff, manager of Chernoff Diamond & Co., a consultant based in Long Island, N.Y.

"To try to cubbyhole all the employers into one solution just doesn't work," he said. "We recognize there's no one answer for all of our clients."

One solution that Mr. Chernoff has implemented for about 15 of his midsized employer clients is to try to spread risk more evenly across all the health plans they offer so that savings produced by one type of plan -- usually the HMO -- can be used to offset the higher costs of another -- usually the indemnity plan.

"We take the HMO and pull out the administrative costs, the margin -- everything but the claim costs," he explained. "We do the same with the PPO, the indemnity plan and the point-of-service plan."

"We settle on 'reasonable' fees for administration, and then we agree on margins, giving the insurers as little profit as we can negotiate," Mr. Chernoff continued. "We then put the pieces back together."

"So instead of trapping fairly large margins and potential surplus in the HMO, we're using it to offset higher claims, through lower administrative costs on the indemnity side," he explained.

Such an arrangement works best when a single insurer or plan administrator is used for the various types of plans, he said. That way the administrator can either underwrite all of the products itself or subcontract to other providers, he said.

So far the strategy has reduced employers' annual health plan costs between 8% and 20% over the prior year, but Mr. Chernoff acknowledges the savings may be short-lived.

He attributed some of the lower costs to competition in the health care market, with providers in some parts of the country offering deep discounts to capture market share.

"I don't expect with all the recent loss reports they'll be as aggressive" in the future, he said.

But, even over the long term, Mr. Chernoff expects his strategy will save employers money.

Many employers currently are achieving health plan cost savings by outsourcing administrative services.

For example, Stamford, Conn.-based GTE Corp. decided to hire Lincolnshire, Ill.-based benefit consultant Hewitt Associates L.L.C. when the company decided to centralize its benefit administration, according to John W. Large, team leader for benefit elections.

"We outsourced because of the systems and financial commitment GTE would have had to make," he said.

By using Hewitt, the number of full-time people at GTE handling benefits administration as part of their jobs dropped to 40 from about 280 nationwide, according to Mr. Large.

When the cost of salaries paid to these GTE employees are compared with the fees paid to Hewitt, "it's possible it's a wash," he said. "But there are a lot of hidden costs that can't be counted."

Only when an employer hires an outside consultant to handle benefits do "you find out how much it really costs to deliver benefits -- including the hidden charges that weren't quantified internally," he said, such as the cost of overtime when a secretary is asked to type a benefits-related letter.

Administrative savings definitely can be achieved when an employer with multiple HMOs and insurers in multiple states consolidate into a single health care delivery system, observed Tim Beck, a principal at Buck Consultants Inc. in Los Angeles.

But even greater savings can come if the consultant also acts as a broker, negotiating the best deals possible with various plans, he said.

Jack Bruner, a consultant for Hewitt in Lincolnshire, agreed.

"The real opportunity in outsourcing is to use consultants to shop for the best benefits deal and handle the transaction," he said during a session on outsourcing at the National Managed Health Care Congress held last month in Los Angeles.

"Benefits outsourcing will grow, funded by the savings achieved by it," he predicted.

"Health care delivery systems are changing dramatically," asserted Mr. Beck of Buck Consultants. "They're stepping all over each other. That's why there's a greater need for consultants than ever before.*.*.*.You just can't go to one shop anymore and buy what you need."

"Take PPOs for example. Their network may be good in urban areas, but not in rural areas. So you have to negotiate directly with rural providers. A consultant can do this," he said.

As part of their services, benefit consultants usually analyze client needs, study patient use patterns and types of services and even locations where services are rendered, Mr. Beck explained.

"Once we understand the health care needs of the employer, then we try to locate as few vendors as possible to handle these needs," he said.

The consultant also designs the benefit program, often sitting down and physically negotiating plan changes with vendors, he said.

In some cases, the consultant issues a request for proposal or request for information, whichever is more appropriate, on behalf of the employer.

"We then analyze the response and negotiate with the top vendors to assemble the program, also including performance and reporting requirements," he said.

"This is standard practice for us. Our job is to bring the technical and legal expertise to the client to assist them with managing their programs," Mr. Beck explained.

In some cases, sophisticated employers have begun using consultants to help them get back into the health care funding business, realizing that the discounts produced through HMO-style capitation and group purchasing are beginning to erode.

"Our larger clients are realizing that self-insuring HMOs would make more sense," said Ms. Twanmo of MEDSTAT. "In effect, the employer is taking the risk back from the HMO."

Under such an arrangement, the employer usually pays a monthly capitation premium to primary care physicians in the HMO and then funds hospital and specialist fees on a pay-as-you-go basis, she explained.

The arrangement makes it unnecessary for the HMO to purchase stop-loss coverage or capitation reinsurance, which lowers its administrative overhead, she said.

And while the self-funding employer can purchase either specific or aggregate stop-loss to cap its own liabilities, so far most of them have not, she said.

"Many large employers don't buy stop-loss because they're large enough to spread the risk across the employee population," Ms. Twanmo explained.