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Hybrid health plans that blend self-funding with fully insured coverage are being heavily marketed to small and midsize employers struggling with escalating health care costs.
Some brokers and insurers have dubbed the practice as "under wraps" or "gap insurance" because these hybrid arrangements use a single employer-controlled account to self-fund claims between a high-deductible health plan purchased by the employer and lower deductibles assumed by individual employees.
In promoting the programs, brokers explain that such self-insured layers are permitted under Section 105 of the Internal Revenue Code-the same section of U.S. tax law that the originators of the consumer-driven health plan concept used to develop health reimbursement arrangements.
As with HRAs, any funds remaining in the Section 105 accounts at year-end can be carried over to pay for subsequent years' medical expenses. Unlike HRAs, the balance in the Section 105 account is not allocated to individual employees; rather, the employer retains ownership and control of the account, which also can be funded on a pay-as-you-go-basis.
While many small and midsize employers that have adopted hybrid plans have reaped considerable savings, some insurers have begun restricting the plans they will permit brokers to use in conjunction with a hybrid.
San Francisco-based Blue Shield of California, for example, in June 2003 sent a letter to producers advising them to only "offer the Shield Spectrum PPO Savings Plan in conjunction with an employer wraparound fund."
Blue Cross of California, a Thousand Oaks, Calif.-based division of Indianapolis-based WellPoint Inc., permits this type of arrangement "only under our existing EPO (exclusive provider organization) plan, as it is priced to accommodate this practice."
Neither insurer returned calls seeking comment.
Meanwhile, Anthem Blue Cross Blue Shield of Ohio canceled one broker's contract allegedly because it was promoting this practice (see related story, page 16).
"Since day one this has been a constant gadfly," said David Cowles, co-founder and principal Medfield, Mass.-based Benemax, which began selling hybrid health plans in 1985 and now offers them exclusively.
"We've disrupted their distribution channel," said Tom Quigley, president of Total Benefits Consulting L.L.C., a Loveland, Ohio-based consulting firm that was spun off from broker Total Benefits Planning Agency Inc.
Mr. Quigley said he sold his brokerage business in July after losing his contract last year with Anthem Blue Cross and Blue Shield of Ohio and has developed a software program called Benefits Coach to help employers structure hybrid health plans on their own.
No other brokers offering the plans that were contacted by Business Insurance returned calls seeking comment.
Benemax, however, currently has 225 clients using the approach and, so far, "every client has been making money on it," Mr. Cowles said.
For example, after struggling to keep year-to-year health insurance premium increases below 10%, Salem, Mass.-based supermarket chain Crosby's Markets Inc. expects a 1% to 2% premium reduction going into its November renewals, said Bob Vello, general manager.
"It seems to be working very well," Mr. Vello said.
Under Crosby's hybrid health plan, the employer assumes a $5,000 annual per-person deductible, providing first-dollar coverage up to $1,000 to its 110 employee plan members, 75% coverage between $1,000 and $5,000 and 100% coverage after that. Employees, who contribute $25 per month for individual coverage and $75 per month for family coverage, also make $25 copayments for office visits and have a three-tiered drug plan with $10, $20 and $35 copayments per prescription. The plan also provides dental coverage.
The program is virtually invisible to employees, whose health claims are submitted first to Blue Cross Blue Shield, with those that fall within the $5,000 deductible being handed over to Benemax, which pays the claims from Crosby's Section 105 account.
In some ways, it's like being fully self-insured with stop-loss coverage attaching at $5,000, Mr. Vello said.
Another Benemax client, a 500-group life employer in Philadelphia that Mr. Cowles declined to name, reduced its annual health care premiums from $3.5 million to $2.4 million by switching to a PPO with a $2,000 deductible from a point of service plan with first-dollar coverage. After paying $575,000 in claims and administrative fees, the employer saved $525,000, he said.
"If we can't save an employer at least $1,000 per employee, we'll do another approach," Mr. Cowles said.
After cutting health care premiums by 55% in the first year, the University of Nevada School of Medicine Multi-Specialty Group Practice South in Las Vegas saw premiums go up between $1 and $2 per covered employee in its second year of having a hybrid health plan with a $7,500 deductible above employees' $250 deductible, said Craig Seiden, fiscal officer. The medical group's plan is administered by Investment Insurance Services Inc., a benefits broker in Las Vegas.
"The additional claims expense hasn't made any appreciable difference," he said. "The plan has paid off amazingly. Our reserves have built up to the point that even if we had a significant claims exposure in any given year we'd be able to weather that."
The medical group, which pays 100% of the premium for employee-only coverage, used a portion of its first- and second-year savings to add fully paid vision coverage, expand its dental coverage and begin subsidizing dependent care coverage, for which employees had been paying 100%. Now, employees pay two-thirds of the cost of dependent coverage, Mr. Seiden said.
Benemax's Mr. Cowles said that while hybrid health plans work best for employers with 100 to 500 plan participants, he has structured successful programs for employers with as few as 10 covered lives.
"It's a powerful tool for employers that aren't experience-rated," he said. "Groups under 100 generally aren't experience-rated, and groups with 100 to 500 lives have an element of experience rating and community rating. Once you get over 1,000 lives, they're all experience-rated."
Though Mr. Cowles said he has met with some initial resistance from insurers to the hybrid health plan concept, he usually wins their support after showing them how the programs can be beneficial to insurers as well. One argument insurers generally present is that employees are likely to be more conservative when they spend their own health care dollars.
"Even if the employer is the principal claims cost sharer, there's usually positive claims experience," he said. This is because "when an employer takes on claims risk, they tell their employees. Employees realize that their benefit costs will be affected by claims, so there's 'social pressure' not to smoke two packs a day or to get fit."
Moreover, "once an employer has skin in the game, they're much more receptive to doing something that affects their risk pool," such as implementing wellness and disease management programs, which is often anathema to small employers because of the added cost, Mr. Cowles said.