| 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 SAVING 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. | | CYNTHIA HARRINGTON, CFA, is a California-based financial journalist who has written extensively on the revolution in health care financing. Her work appears in a variety of financial publications. She is a contributing editor to Accounting Today and horsesmouth.com , a subscription Web site for financial advisers. | 
n 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 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. 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. In past years cost pressures hit small employers hardest. Now, CPAs at larger employers are equally pressed to find ways to cut benefit costs. “It’s not just the little Hallmark store down the street that’s under duress,” says Maria Ghazal, director of health policy for the American Benefits Council, a large employer lobbying group in Washington, D.C. “This year, big employers are sharing the pain of higher health insurance premiums.” | | Dealing With Growing Health Care Expenses 
Employers expect a 15% increase in health insurance costs in 2003 but say they can afford only an 8% jump.
Some 94% of surveyed companies report significant or critical concern by top management about the rising cost of health benefits and the impact on corporate expenses.
Almost all companies (90%) are significantly or critically concerned about the impact of health cost increases on their employees.
More organizations believe the current pharmacy-benefits delivery model increases costs rather than decreases them (42% vs. 28%). Source: Hewitt Associates, www.hewitt.com , January 2003. | | Experts blame a multitude of factors for the increases. Managed care squeezed out all the possible savings and now must rise with the competition. Prescription drug and hospital costs are soaring. Technological advances keep new procedures—at higher costs—in the forefront. Mandated coverage from federal and state governments adds additional costs. Whatever the reason, consumers spent 10% more on health care in 2002 than the previous year—the first double-digit increase since 1990—and that’s driving premiums higher.
Some observers put the whole third-party payor system at the core of the problem. When spending decisions rest with insurance companies, the health care consumer has no relationship to the ultimate cost of his or her choices. The consumer ends up voting not with his or her pocketbook, but simply for high-quality, effective care. “Third-party payments always mean third-party rationing,” says Greg Scandlen, director of the Center for Consumer Driven Health Care in Alexandria, Virginia. “Individuals aren’t valuing the services and products they receive so there’s no hope of improving quality at a lower cost.” FINDING A SOLUTION
As most CPAs already have observed, employers are making benefit changes in an attempt to bring insurance costs back in line. According to Jean A. Moore, Fellow of the Society of Actuaries, principal and director of actuarial issues for Towers Perrin in Denver, 2003 is the first year some employers finally were willing to pass on a portion of the increasing costs to employees. They’re doing so by raising deductibles and copay levels and shifting more of the premium cost to employees. Moore adds: “What some employers have been doing to keep costs down is no longer working. And they don’t see a silver bullet—like managed care when it was introduced—on the horizon. They have to rely on a broad spectrum of different solutions to control costs.” Another goal is to make the employee more accountable for his or her medical expenditures. Some employers are shifting spending decisions on smaller medical expenses from insurance-paid to employee-paid by means of flexible spending accounts (FSAs) and the newer health care reimbursement accounts (HRAs), discussed below. Moore says employers must set contributions so employees have an incentive to “behave appropriately”—that is, by making more cost-effective medical care decisions. When health plan costs become a problem for a company and its employees, Moore guides clients through a step-by-step process that CPAs can incorporate into their own current cost analysis methods. First she conducts a thorough investigation into the company’s health plans to make sure they are the best available in the area. Next she “looks inside” each plan to determine its effectiveness. That means analyzing the age and health of those enrolled in different offerings and adjusting the costs to account for effectiveness. “Employers too often equate effectiveness only with the cost of premiums,” she says.
| Exhibit 1: How Small Employers Are Changing Benefits Offerings |  | | Source: Community Tracking Study site visits—2000 to 2001, Center for Studying Health System Change, Washington, D.C., www.hschange.org . | After the initial analysis, Moore helps her clients find the best vendors for the best insurance plans. Finally she advises selectivity. By choosing to offer fewer plans, clients increase their ability to negotiate pricing in the market. Moore’s recommendations for evaluating a health plan are summarized in exhibit 2 , below. | Wernick ground through the process of renewing Datafaction health coverage and ended up shifting some of the costs to employees by offering a PPO 30 instead of a PPO 20 and an HMO. Going to a $30 copay from $20 kept the company’s premiums at the old rate, ameliorating the 15% increase. Employees who chose to could upgrade and make up the premium differential themselves. “Fortunately, we work with Blue Cross, which offers a full menu of choices to our employees,” says Wernick. | Datafaction also introduced a solution that forces employees to better understand the implications of their medical spending decisions and transfers some of the health care cost risk to them with an FSA, a type of cafeteria plan authorized under IRC section 125. These plans allow employees to purchase qualified benefits, such as medical or 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. The disadvantage of FSAs is if employees guess too low, they incur out-of-pocket medical expenses paid with aftertax dollars. If they guess too high, the remaining money reverts to the employer. | | Exhibit 2: Annual Health Insurance Review Checklist | 
Do an extensive evaluation of the company’s current offerings to make sure it has the best coverage available in the area.
Gauge the effectiveness of each of the company’s current plans by analyzing the population in each plan vs. the premiums charged and adjust for the age and health of the employees enrolled in it before comparing premiums.
Look for the vendors in the area with the highest consumer satisfaction ratings.
Choose fewer plans to increase the company’s leverage to negotiate price. | | | CPAs will find that FSAs can be costly to design and to administer. Wernick chose AFLAC to handle his company’s plan because the insurer charged a nominal fee to administer it as long as at least three employees bought at least one additional product from AFLAC, such as long-term-care or dental insurance. Not all companies are shifting costs to employees. Daniel Koskovich’s employer still absorbs significant double-digit increases because he is unwilling to modify the company’s level of coverage. “Our CEO believes providing this benefit for employees is part of the company’s core philosophy,” says Koskovich. Koskovich, a CPA, is CFO of 200-employee Canon Communications, a diversified media and publishing company in Los Angeles. Canon pays the full cost for employees for health, vision, dental, life and short- and long-term disability insurance and prescription drug coverage. The employee bears the cost of dependent coverage. “We take this one year at a time,” says Koskovich. “We find little ways to reduce costs by aggressively looking at vendors and putting the whole program out to bid each year.” CONSUMER-DRIVEN HEALTH CARE
A new solution is on the horizon. In June 2002 the IRS ruled employers could offer HRAs under IRC section 105. While they are a relatively new idea, CPAs who take the time to investigate HRAs stand to save employers money on benefit costs. Under such a plan, the sponsor makes a tax-deductible deposit to an employee’s HRA, usually $1,000 to $2,000 per year. The deposit is not taxable to the employee, who uses it to pay medical costs usually covered by health insurance. What the employee doesn’t use rolls forward to the next year so the amount builds over time, lowering the risk to the employee. One company’s plan description in exhibit 3 , at right, details these and other legal and financial characteristics of HRAs. The clear advantage of this self-funded health plan for employers is the lower cost. Even for plans that pair an HRA with some catastrophic health coverage, the plan is cheap compared with other options. Since consumers spend their own money for care, they have an incentive to buy smart. The disadvantage is that in the early years the employee might be underinsured and an unexpected health problem could turn into a serious financial burden. An underinsured employee becomes a reverse benefit for an employer; the employee worries about paying health care costs instead of concentrating on doing his or her job. | | Exhibit 3: Sample HRA Plan Description | | XYZ Co. Health Care Reimbursement Account Each year you can set aside 
$100 to $3,000.
To be eligible for reimbursement, expenses must be
Medically necessary.
Incurred by you, your lawful spouse or anyone you claim as a dependent on your tax return.
Not reimbursed elsewhere.
Considered tax-deductible by the IRS. You are reimbursed
Up to your annual election less any previous reimbursements.
Up to the current account balance. These special rules apply:
Reimbursed expenses cannot also be claimed on your tax return.
Lawful spouses working for the same employer each can contribute up to the maximum to separate accounts. | | | CPAs also will note that consumer access to information about providers and prices forms the foundation of HRAs. Providers address this need by giving employees access to a database of local physicians and hospitals that rates providers according to quality and price. Companies offering these plans are members of the Consumer Driven Health Care Association. Among them are Destiny Health, HealthAllies, HealthMarket, Lumenos, MyHealthBank and Vivius. “We’ve gotten too far away from consumers’ understanding the price of the medical care they receive,” says Scandlen. “HRAs are pretty much in their infancy but will become much more common with the advent of accessible, understandable health care information.” For employers thinking of adopting a consumer-driven plan, benefits experts at Buck Consultants created a self-assessment questionnaire, found at www.buckconsultants.com/Services/cdhsurvey.asp . Actuary Brian Stitzel says HRAs are too new to guess the level of acceptance. “Some of the companies that acted on HRAs early had gotten to the point where they couldn’t afford an alternative. Others thought of themselves as cutting edge. But enrollment is still really low. We don’t know whether only the healthier employees will opt for these plans, leaving traditional plans with the greater risk enrollees.” HRAs carry additional risks in plan administration. The IRS issued its first notice in early January, which made it clear employees could not use HRAs to pay section 125 plan premiums without direct reimbursement documentation. “After talking with the IRS, our firm is taking the position that if you mess up any part of the HRA, the whole thing blows up,” says Karen Field, director of compensation and benefits for KPMG’s national tax office in Washington, D.C. | The easiest way to torpedo the favorable tax treatment is to reimburse employees for nonreimbursable expenses. Field says the IRS might overlook an inadvertent mistake, but if the company doesn’t rigorously check to make sure only covered requests are permitted, the plan could be in jeopardy. She gives the example of a plan that provides a credit card for enrollees. The employee might buy a completely allowable prescription but also pick up a bottle of cough syrup and pay for both with the HRA card. Other traps lie in communicating plan features to employees. For instance, the expense for a health club is deductible under IRC section 213 for people under doctor’s orders but not for anyone else. If the employer lists “health club” as an allowable expense without the condition, the sponsor is open to employee legal action. Employees also have to understand that, if they decide to leave the company, the funds revert to the employer. | | For More Information… AICPA Spring Industry
Conference June 19–20, 2003
JW Marriott
Las Vegas, Nevada For registration and additional details call 1-888-777-7077 or visit www.cpa2biz.com/conferences . | | MORE CHANGES COMING
The current solutions of shifting costs to employees, cutting back on coverage and increasing consumer involvement solved some of employers’ health insurance problems this year. However, experts see changing plan design features as short-term fixes. Over the long term, sponsors need to continue to encourage consumerism. They also need to rigorously evaluate particular employees’ needs and tailor plans to meet them, not the mass market. For instance, a workforce with a high incidence of one type of medical condition might be able to lower costs by including specialists with higher-than-average success in treating that condition in the provider network. “Expecting a simple solution is not realistic,” explains benefits expert Moore. “This is a complex issue, and it’s going to take sophisticated analysis to find a long-term solution.”
Health Care Resources
American Benefits Council, a national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system, www.americanbenefitscouncil.org .
Buck Consultants, an employee benefits consulting firm, www.buckconsultants.com .
Center for Studying Health System Change. Designs and conducts studies focused on the U.S. health care system, www.hschange.org .
Consumer Driven Health Care Association, www.cdhca.org .
Hewitt Associates. Provides management strategy and human resources services, www.hewitt.com .
National Business Coalition on Health, an authority on how employers buy, manage and pay for health care, www.nbch.org .
Towers Perrin, a global management consultant, www.towers.com . | |
