Bob sits in his office and looks out over his panoramic view of the company parking lot and ponders what to do. He has just received notice that his company, Acme Tool and Die, must pay 30% more for health insurance for its 512 employees than it did the previous year.
This comes after three consecutive years of increases exceeding 20%. That means for every $100 Acme spent for health insurance in 1989, the company now is paying more than $173--in spite of Bob's diligent efforts to provide a wellness program for Acme's workers: a smoke-free workplace, lunchtime aerobics and weight-control classes, and so on. This program has helped, he's sure, because colleagues from neighboring companies have experienced even greater increases in health care costs. In spite of his efforts, Bob is on the hot seat, facing displeasure from employees, the stockholders--and the CEO.
Bob isn't alone in his quandary. Health care costs in the U.S. have performed a lift-off in recent years that would make NASA envious. In 1989, we spent $2,354 on health care for each man, woman and child in the U.S. That's 85% more than France and 158% more than Denmark. In fact, we spend more on health care than any other country in the world.
You get what you pay for, right? Not in this case. We have one of the shortest life spans and one of the highest infant mortality rates of any industrialized country. This was already the case before the recession hit, with its downsizing and bankruptcies, its rising ranks of the uninsured, and the increased burden on the insured, as providers passed along to us the costs of providing emergency care to people who can't pay and have waited too long to see a doctor. Such factors as increased litigation or injuries resulting from crime have contributed, as have the high administrative costs associated with a privatized health care financing system--11% to 12%, as compared with 3% for Medicare and only 1% for the Canadian public health insurance system.
Bob could wait for President Bush and Congress to find a solution and agree on it. Somehow, though, he doesn't think his company can wait that long. He knows he must find a solution before the increases come again next year.
A solution that attracts increasing numbers of companies--because it addresses the administrative costs and some other aspects of the problem--is self-insurance. James A. Kinder, executive VP of Santa Ana, California-based Self-Insurance Institute of America, says that approximately 60% of the employers that have 100 employees or more use some type of self-insurance. "Now we see these programs used by companies having as few as 20 workers," he says.
An organization that switches from traditional health insurance takes on some or all of the expenses--and risks--of providing health care for its employees. How much of the risk it can assume depends on such factors as its size and the demographics of its population.
Some larger companies are entirely self-funded, which means that they don't pay outside insurance, but pay premiums collected from employees, along with the company's contribution, into a fund set aside for that purpose. Smaller companies or organizations unwilling or unable to assume that much risk may elect to purchase reinsurance, which covers health care expenses beyond a set amount. There are two types of reinsurance:
* Aggregate stop-loss pays if all claims from the company exceed the anticipated amount by a certain percentage
* Specific stop-loss covers claims of an individual exceeding a set amount.
"Large organizations aren't really taking a risk when they self-insure, because they insure based on their own experiences," says Linda Averack, consultant for Marietta, Georgia-based Magnus Software Corporation. Averack supports processing for self-insured clients and trains companies to use health care benefits software. "Self-insurance keeps money in the hands of the employer, rather than leaving it with the carrier. …