Imagine for a minute that you own and manage a fleet of 100 delivery trucks. Part of your employment policy requires your drivers to take their trucks to the local Quick Lube every 5,000 miles for an oil change and maintenance. One year after implementing the maintenance program, 10 trucks have been turned in for service with a blown engine. Your purchasing department, with great enthusiasm, tells you although the engines cost $10,000 each, in the future they have negotiated a 10 percent discount due to the volume of service you provide the repair shop.
Meanwhile, your fleet manager audits the drivers’ records and finds out that 90 percent of the drivers NEVER brought their trucks in for scheduled maintenance. What would you do?
Continue to allow the drivers to ignore their scheduled maintenance and celebrate the $1,000 discount you are getting on the $10,000 engine repair?
Terminate the drivers who are non-compliant?
Create an incentive program to encourage the drivers to comply?
Penalize the drivers who are non-compliant?
Employees who are reckless with their own health and ignore scheduled maintenance (regular physical exams and biometric tests) are just like the truck drivers. Their machine is going to break down! These breakdowns (heart attacks, strokes, diabetes, cancer, etc.) can cost hundreds of thousands of dollars!
Employers who address the high cost of medical insurance by changing companies every year, increasing deductibles and co-pays or increasing the costs to their employees are addressing the symptom and not the cause –just like our purchasing agent.
Let’s go back to Insurance 101. Risk management is a strategy that will work whether you have two employees or 200,000. There are essentially four ways to manage risk: avoid the risk, transfer the risk, reduce the risk or retain the risk.
Ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions. But, we can start with the following basic methods.
This proactive strategy requires the employer to eliminate the possibility of the risk manifesting itself in a negative occurrence. As this method relates to health insurance we could use one of the following strategies:
- Don’t hire any new employees.
- Don’t offer a health insurance plan to employees.
- Institute a testing program to screen out employees who may be predisposed to incurring health issues due to the job they are performing.
This strategy involves methods that reduce the severity of the loss or the risk of the loss occurring. As this method relates to health insurance we could use one of the following strategies:
- Implement extended waiting periods or use the new Affordable Care Act one-year measurement before employees are eligible to participate in the medical plan.
- Eliminate or cap coverage under the medical plan for non-statutory illnesses and treatments.
- Use strict managed care programs and disease management programs.
- Offer the maximum premium differential (30% to 50%) for wellness programs.
- Employ reference-based pricing to encourage employees to select lower-cost providers once a claim is incurred.
This strategy involves accepting the responsibility and cost of loss when it occurs. True HYPERLINK "http://en.wikipedia.org/wiki/Self_insurance" \o "Self insurance" self-insurance falls into this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. As this method relates to health insurance we could use one of the following plans of action: This strategy involves accepting the responsibility and cost of loss when it occurs. True falls into this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. As this method relates to health insurance we could use one of the following plans of action:
- Use self-funded insurance plans.
- Use partially self-funded insurance plans.
- Secure a High Deductible Medical Plan while employer reimburses employee for a portion of the deductible.
This means causing another party to accept part or all of the risk, typically by contract or by hedging. Health insurance transfers some, or all, of the risk to an insurance company. Insurance is one type of risk transfer that uses contracts. At other times, risk transfer may involve contract language that transfers a risk to another party without the payment of an insurance premium. As this method relates to health insurance we could use one of the following advanced health plan options:
- Health Savings Accounts
- Defined-contribution medical plans
- High Deductible Health Plans
- Utilization of a PEO (Professional Employment Organization)
- Employee Medical Expense Reimbursement Program
- Spousal waiver programs
- Individual medical plans (either on the exchange or off the exchange)
- Gap insurance programs
- Symbiotic or skinny health plans
- Smoker, non-smoker rates
- Probationary medical plans
- Integrated enrollment in Medicaid and Medicare
The above strategies can reduce insurance costs by up to 25 percent immediately without changing plan designs or carriers. The process starts by identifying the risks, evaluating options, mapping out a strategy, setting up an implementation timetable, communicating the initiatives, monitoring participation and results, and then re-evaluating the strategies on a continual basis.
Make 2014 the year that you drop your health insurance rates and lower your renewals! Manage the risk and lower costs will always be a by-product.
Thomas P. Wagoner, CFP, is a Certified Healthcare Reform Specialist and president of Accelerated Benefits.