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As 2002 rolls to an end, many plan administrators and benefits managers are preparing themselves for another round of double-digit medical and drug renewal increases. These increases seem to continue year after year, with no end in sight. Some studies show that health care costs will double within the next five years. Clearly, this inability to control costs without diminishing the quality of health care provided to employees is extremely frustrating to employers, especially small and midsize firms. Before we explore what can be done to control these costs, let’s examine the factors driving them. Prescription drug expenditures, which account for more than 20 percent of total health care costs, have been increasing by double digits. Drug companies and their advocates claim that prescription drug costs are higher as a result of both patients and doctors being better informed about the new drugs available. They also argue that the ever-growing senior population will continue to spur the use of prescription drugs, to enhance their quality of life, shorten hospital stays, and reduce the need for surgery and other expensive treatments. Consumer advocacy groups, such as Public Citizen, have a different perspective. A July 2001 report contends that drug companies are spending millions in advertising and passing the fees along to patients. In fact, a National Institute for Healthcare Management report in 2000 found that “the 25 most-advertised drugs accounted for 41 percent of the increase in overall 1999 drug spending.” Many companies battle these rising costs by raising employee premium contributions and increasing deductibles, co-payments, and out-of-pocket maximums. To many, this rationale makes sense. Those who utilize benefits more should pay more. On the other hand, the firm or company may lose its edge in retaining and recruiting employees, not to mention the effect on employee morale. PRESCRIPTIONS FOR CUTTING COSTS There are other, more subtle strategies employers can use to reduce the bill for prescription drugs. 1. Encourage employees to use generic drugs, when available. Requiring employees to pay the difference between the cost of brand-name drugs and the cost of generic equivalents, when they are available, will lower costs for both employees and employers. 2. Offer a three-tiered drug program or a formulary list. A generic/preferred/ nonpreferred structure will encourage employees to use generic equivalents when possible and reward them with a smaller co-payment. Those who choose to get the preferred brand-name drugs that do not have generic equivalents (Tier 2) will have a higher co-pay. Those who select Tier 3, nonpreferred brand-name drugs for which generic equivalents may or may not be available, will have the highest co-pay because they are the most expensive. 3. Encourage employees to use prescription mail programs for medications to treat chronic conditions. Most drug plans limit prescriptions to a 30-day supply for a single co-pay, but mail-order service can offer a 90-day supply for the same single co-pay. Both employee and employer benefit from deep discounts with mail-order prescriptions. What many participating employees appreciate when selecting a health care plan is the ability to choose. While some participants may choose to pay more for brand-name drugs, others may pay less by opting for the generic version. These choice-based strategies are more likely to be favorably received by employees than simply increasing co-pays, deductibles, and out-of-pocket maximums — especially when all the benefit options are clearly explained. • Technology. One costly component of the benefits plan that cannot be overlooked is the management and administration of the plan itself. Many HR departments are plagued with paperwork at enrollment time, and often are understaffed to answer questions regarding benefits. Many employers have made major investments in intranet sites, as well as software, that allow employees to access summary plan information, claims status, and even enroll online. What surprisingly few employers know is that this technology platform is available at little or no cost through brokerage arrangements. All the administration of all benefit lines can be performed on this platform, reducing the number of calls from employees to their benefits department. • Disease Management. Another cost containment strategy that focuses more on the long term than on shifting costs to employees is the use of disease management programs. These programs are designed to educate patients about their specific condition and the importance of following treatment plans so as to avoid costly hospital stays and procedures down the road. • Fully Insured vs. Self-Funded. Since the 1980s, large corporations have been using self-funded and partially self-funded health plans to control health care spending. Over the last decade, more small and midsize firms and companies are examining this concept as well. These plans allow employers to exert much more control over health expenditures by identifying heavily utilized benefits and implementing measures to control them. The premise that partially self-funded plans are based on is that employee health care claims are paid by employer funds, up to a certain dollar amount. That is where “specific stop-loss” and “aggregate stop-loss” come into play. Specific stop-loss protects the employer against claims above a specific dollar amount on a per-participant or per-family basis. Aggregate stop-loss protects the employer from large claims from multiple employees that in total exceed a certain dollar amount. Many people prefer to think of stop-loss as a firm or company deductible on an employee and group basis. Partially self-funded health plans allow an employer to customize multiple plan options to offer employees, instead of the one-plan-fits-all mentality. Offering options with varying paycheck deductions, co-pays, deductibles, and out-of-pocket maximums allows each employee to choose the level of coverage that makes the most sense, based on his or her situation. These plans also give the employer the ability to assess the factors driving the bulk of the claims and to implement cost-control measures going forward. • Defined Contribution. Another recent, highly publicized measure to lower health care costs is the defined contribution health plan. The savings that such plans can provide to employees and employers can be very attractive. Participants in these health plans are given defined amounts of money to purchase one of several health care plans. These plans are touted as less costly than the traditional employer-sponsored plans because employees are able to make their own health care decisions and purchases. Skeptics contend that because participants must have the ability to access options and treatment information and analyze that information, the true cost savings are not yet clear. Law firms and other employers are struggling to manage rapidly rising health care costs without alienating employees. A recent survey by a national benefits consulting firm, Watson Wyatt, suggests that companies that aggressively implement measures to control costs enjoy a slower rate of increases than the companies that do not. Watson Wyatt recommended implementing a combination of strategies for the best results. It is safe to say that employers need to be both proactive and reactive to stabilize health care costs. William B. Minturn is a partner at Financial Benefit Services, a Kensington, Md.-based benefits brokerage firm that specializes in insurance and financial services for individuals and businesses. He can be reached at (301) 949-1000, Ext. 27.

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