Health Care Costs on the Rise: How Companies Are Coping
EXECUTIVE SUMMARY * THE COST OF PROVIDING EMPLOYEES WITH HEALTH insurance coverage is increasing at a double-digit rate. Businesses are seeking to solve the problem by decreasing their premium contributions, changing the products they offer or the insurer and even reducing coverage. CPAs can help suggest cost-saving strategies to reduce the impact of insurance premiums on the bottom line. * WITH ALL OF THE POSSIBLE SAVINGS ALREADY SQUEEZED from managed care, soaring costs for prescription drugs, hospitalization and other services in 2002 translated into a 10% increase over the prior year in the amount consumers spent on health care. For many businesses, premium increases meant they couldn't afford to continue with their previous insurance offerings. * THE YEAR 2003 SAW BOTH LARGE AND SMALL employers facing cost pressures. Many employers are passing costs on to employees by raising deductible and copay levels and shifting more of the premium expense. The goal is to save money by making employees more accountable for their medical expenditures. * A FLEXIBLE SPENDING ACCOUNT (FSA) UNDER IRC section 125 allows an employee to purchase qualified benefits, including medical and dental expenses, using pretax dollars. At the beginning of each year, the employee designates how much he or she wants to contribute to the account; unspent funds revert to the employer. * ANOTHER ALTERNATIVE IS CONSUMER-DRIVEN health care. Using a new health care reimbursement account under IRC section 105, an employer sets aside $1,000 to $2,000 per year that the employee can spend on health care. Consumers spending their "own" money have an incentive to buy smart. Any unused funds roll over to the next year. In this soft economy, declining revenues are putting the squeeze on corporate expenses. One expense, however, is squeezing back. The cost of providing employees with health insurance coverage is increasing at double-digit rates. Some companies experienced 20% and 30% increases when the 2003 renewal forms landed on decision-makers' desks. Forced to make changes, businesses are seeking help. They're finding solutions by using outside consultants and changing the offerings they make available to employees. This year no single solution has come to the fore, and there's widespread skepticism about whether current cost-saving ideas can stem future increases. According to the Center for Studying Health System Change, companies have tried many things, such as decreasing premium contributions, shifting costs to employees, changing the products offered or the insurance carrier and reducing coverage and eligibility. (See exhibit 1, page 60, for a breakdown.) These are some of the cost-saving strategies financial managers and other CPAs can suggest when human resource executives ask for help reducing the impact of health insurance costs on the company's bottom line. [GRAPHIC OMITTED] THE SCOPE OF THE PROBLEM The unwillingness of businesses to continue to absorb health insurance cost increases is widespread. According to a recent study by human resources consultant Hewitt Associates, employers expect a 15% premium increase this year but say they can absorb only 8%. For many businesses, that means they simply can't afford to continue with their previous insurance offerings. "We can't raise the cost of the services we sell as fast as our health insurance premiums are increasing," says Jonathan J. Wernick, CPA, general manager for Datafaction in Los Angeles. "We still want to provide the same good coverage to our employees--we just can't afford the cost increases." Wernick is responsible for benefits plan decisions for a 40-employee software company that provides multiclient and multiuser accounting programs for accountants and wealth, business and talent managers in the entertainment industry. In addition to skyrocketing costs, 2003 has been distinguished by another shift in the market. …