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Healthcare Reform: “A Peek at the Cost”

Effective January 1, 2014, the community rating provision of Healthcare Reform goes into effect for small employers. Experience tells us that costs will increase. Lets take a look at what it may mean to you in dollars and cents.

Most have heard that the new Healthcare Reform bill was projected to cost $850 billion. Many of us have heard the revised estimate of $1.2 trillion. Not many of us can explain $1.2 trillion in layman’s terms. The government hasn’t shared specifics about the cost in any meaningful way. So for many, the “cost of healthcare reform” becomes a point of conversation without much reality connected to it.

We know the reform will level the playing field in terms of cost. Generally, rating will be based on broad geographical areas with little ability to modify the rates to account for differences in risk. This rating strategy is called “community rating”. Let’s compare community rating to the way groups are currently rated in Ohio (our primary warehouse location).

There is general scuttlebutt that the Blue Cross plans will fare the best and gain the most in the healthcare reform implementations. It may or may not be a coincidence that Blue Cross of Michigan also “community rates” their coverage. In Ohio, many groups fall under a formula of rating that takes employee and dependent health into the formula to calculate rates for insurance coverage. In Ohio there are 36 rating tiers. Tier 1 is reserved for the healthiest risk. Tier 36 is the maximum rate applied to the worst risk.

Let’s compare the same company as if it were located in Toledo, Ohio, on Alexis Road (1/2 mile south of the Ohio/Michigan border) and then re-rate the same group, except assume the company is located in Lambertville, Michigan, on Smith Road (1/2 mile north of the Ohio/Michigan border). In Ohio they could have a range of rates, from Tier 1 to Tier 36, depending on the health risks present. In Michigan … just one mile north, all companies would pay the same rate because of the community rating system.

Here is a rate comparison for a $3000 deductible HSA plan:

                                                             Ohio Tiered Rate                               Michigan
                                               Best Risk                      Worst Risk           Community Rating
Employee Only:

Calculate the total premiums of your group to see the cost comparison between tiered and community rating. Most find that community rating is about 50% more expensive than the Tier 1 (best risk) rate and almost 7% higher than the Tier 36 (worst risk) rates in Ohio. Of course, the employer’s dependent status will vary by employer. It is difficult to understand how costs will be less under the new healthcare reform program. This comparison is a casual look at what employers may expect in term of costs.

Poor procedures cost thousands…

The price of health insurance is important during this era of tight labor and customer demands to reduce cost. Companies spend many hours and much effort competitively bidding their health insurance each year in order to have the best cost available to them.

After all the effort to reduce cost, some companies give back much of the savings because of poor administration and accounting procedures. Poor internal practices for handling employee terminations from benefit plans are the main culprit.

For example, without good communication between the “plant” and “accounts payable” with regard to employees quitting or being removed from the benefit plans, extra premiums can be paid and never recovered. With just one late or “non-communicated employee termination” per month, a company could easily pay $8,000 to $10,000 more per year for medical insurance than they need to pay. Most insurers will only give credit for 30 to 60 days of back premiums, making recovery of funds almost impossible.

Another area that is difficult for some employers to monitor is the “accounts payable” function. Most insurers require that their invoice be paid in full each month. This means that you’ll pay for all employees listed on the invoice even if they are terminated from employment. The insurer will then give credit in future months for terminated employees. Without good procedures to track the credits that are owed to your company, it is easy to forget or overlook them.

TransparentRx recommends that employers develop written procedures and checklists for termination of employees. The procedure should outline all steps to be taken from the moment an employee is terminated to the time credit is received from your insurance company. A little extra supervision of your employees that are new to the positions responsible for employee terminations and insurance bills is also a really good idea.

Tyrone Squires, MBA, CPBS

I am the proud founder and managing director of TransparentRx, a fiduciary-model PBM based in Las Vegas, Nevada. We help health plan sponsors reduce pharmacy spend, by as much as 50%, without cutting benefits or shifting costs to employees.

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