ERM's biggest challenge?

Rough Notes, Aug 2003 by Moody, Michael J

Health insurance costs move to the top of the list

One of the founding principles of enterprise risk management (ERM) is its 360-degree view of the company. This greatly expands the traditional risk management view of "insurable risks" silos. It also requires a more focused view of any risks that may impact the bottom line. While today's corporate risk professionals have a wide array of new and emerging risks with which to concern themselves, it is an old nemesis that is causing many companies undue financial pain. Rapidly escalating health insurance costs are beginning to impact the bottom line of many companies, large and small.

When major health care increases began showing up several years ago, initially, it was smaller employers who saw the lion's share of rate increases and premium escalations. These companies had little bargaining power with their insurance companies and few alternatives available to them. But today it's the larger employers that are crying "uncle." Ford Motor Co. is a perfect example. Ford, which is celebrating its centennial year, like so many large firms sees the cost health care as a drag on its bottom line. Bill Ford, Jr., chairman and CEO of Ford, said the cost of health care was "one of the toughest challenges facing Ford Motor Co." Ford went on to say, "Health care is just out of control," and it is a "system that's broken." He concluded his comments to a regional Chamber of Commerce meeting by observing what many other CEOs are becoming increasingly aware of-the rising cost of health benefits is the "biggest issue on our plate that we can't solve." It is clear that this problem is no longer the exclusive domain of small employers.

Scope of the problem

Just how bad is this problem? Many corporations are in the fourth year of double-digit inflation for their health care costs. Typical increases for the past three years have been in the 14% to 18% range. This has resulted in the average health cost for a single worker increasing from $1,014 in 1998 to being over $1,753 for 2003. And this growth is between four and five times the increase in the CPI. It has put many companies' health insurance benefits on the critical list. The size of these increases is simply unsustainable in the long run and could endanger the entire health care system.

And while the above numbers are disheartening, the real problem is that there is no end in sight. Survey results from a variety of sources indicate that this runaway inflation in health care will continue unabated for the next few years. Obviously, this is an unsustainable position for most U.S. corporations. Most employers now report that they are unwilling to absorb these increases, creating a unique problem for their employees.

Possible solutions-another "Silver Bullet"?

Many viewed the introduction of managed care in the early 1990s as a "Silver Bullet" in the fight to control health care costs. And in many respects it was successful in holding health care inflation in check during those years. Average annual increases during this period were in the 4% to 6% range. While this was good for the employer's costs, consumers quickly tired of the tight controls that managed care imposed upon them. By the start of the new millennium, the backlash to the "gatekeeper" approach was overwhelming. As a result, managed care organizations began to loosen their grip on accessing health care providers, and higher costs soon followed.

Today, we are left with double-digit increases and few viable alternatives to turn to. One alternative, however, is drawing significant amounts of attention. It is the consumerdriven health plan (CDHP) whose cornerstone is the active involvement of educated, empowered consumers.

While each carrier's plan designs are different, the basic core concept is similar. The central concept is based on the employer making an annual, tax-free contribution to each employee's health account, i.e., health reimbursement arrangement (HRA). The money that is deposited into the HRA ($1,000 in the accompanying graphic) is in the control of the employee who can spend it on any approved medical expenses with any doctor. If there is any money left at the end of the year, the employee can roll over the remainder into the next year. The rollover feature gives the employee an incentive to make sound health care decisions over the course of the year.

Concern has been voiced from the beginning of the consumer-driven health plan movement that employees may forgo preventive maintenance type health services so that they stay within their HRA account balances. As a result, most plans currently offer preventive care services that are 100% reimbursable and are not levied against the employee's HRA balance. These two components make up the bottom layer of the CDHP program.

Coupled with the HRA account, employers provide a catastrophic health insurance policy to cover more significant claims. The policies are traditional PPO type policies that usually provide a 100% for "in-network" and 80%/20% "out-of-network" benefits. There is, however, typically a difference between the maximum in the HRA account and the deductible under the catastrophic insurance policy ($1,500 in our example). This leaves a deductible or "bridge" amount of $500, which is the employee's responsibility.