Health care for employees

The costs of providing health, life and disability plans are rising steadily for public employers while revenue sources are more scarce. Cutting benefits is not an option, because either employees will not accept it, or unions will prohibit it. Bargaining for discount rates from PPOs, HMOs and other healthcare providers is virtually impossible for the smaller employer, but through joint purchasing, a balance can be struck between affordable rates and maximum healthcare options for their employees.

Many medium- to larger-sized communities have separate life, medical, disability and dental plans for the city, county, one or more school districts, public hospitals and learning institutions. Public works departments within these communities also may have separate plans. Each plan has its own insurance carriers and service providers, which in turn have their own administrative and overhead costs. And, because some public entities are small, they may need outside assistance and end up paying commissions to local agents or brokers.

Some states have made arrangements to help cities, towns, counties or school districts purchase affordable health care and other types of insurance coverage. These state-arranged options are:

(1) statewide trusts, (2) provisions for smaller public entities to join the state employees’ health plan and (3) a multiple employer plan established by a league of municipalities or a league of cities. However, there can be disadvantages to these options — they often are fully insured and expensive to retain. In addition, they are usually state-controlled, which may mean more regulations and stiffer penalties for non-compliance.

By combining to purchase insurance coverage, small- and medium-sized public-sector employers can negotiate for lower rates. This technique can save participating employers hundreds of thousands of dollars in the first year alone. Additionally, savings can be sustained and even increased over the long term if the participating employers combine to secure discounts from health care providers. By forming a purchasing cooperative, several public employers within a community work together to jointly purchase life and health insurance, HMO coverage and administrative services.

Such partnerships allow smaller public employers to take advantage of the rates available to larger groups from insurance companies, HMOs, PPOs and other service providers. Additionally, as a combined unit, they have the size to consider self-funding their medical and dental plans, which they would otherwise be unable to do independently. Existing plans for each of the public employers need not be changed, so losing financial control within each entity is not a concern.

JOINT-PURCHASING OPTIONS

Three options are available to public-sector plan sponsors interested in joint purchasing:

* Trusts. Employers can establish a formal trust, which creates a separate financial and legal entity as the medium for purchasing joint health benefits. This alternative is available in almost all situations.

Also, insurance companies, HMOs and other risk-bearing organizations are generally willing to contract with trusts if state regulations on multiple employer welfare associations (MEWAs) allow or address governmental plans.

Bill Robinson, senior vice president of The Segal Company in Denver, Colo., says, “A trust is a vehicle that allows public entities to comingle assets. If two companies want to merge their plans financially, they’d have to form a trust.”

The disadvantages, however, can include the loss of financial control of the plan sponsor’s health plan to the trust, reduced plan flexibility and the additional legal, financial and auditing costs required by a trust. There also may be issues regarding trust asset ownership if the trust is dissolved.

* Joint-Purchasing Arrangements. Many states allow public employers to join together to purchase services, including health care, without the need for a formal trust. These arrangements have names such as “joint-purchasing agreement” or “Board of Cooperative Educational Services” (BOCES), depending on the state involved.

These arrangements allow the sponsors to maintain financial control of their own plans. There are no issues regarding group assets if the purchasing agreement is dissolved, because company assets are not combined, and a formal joint-purchasing agreement filed with the appropriate regulatory agency is the only requirement in most states.

* State-Specific Options. The legal requirements for the purchasing of health plan benefits by more than one plan sponsor vary from state to state. Some states permit options other than trust-establishing or joint-purchasing agreements.

For example, Colorado allows public- and private-sector employers to form Health Care Coverage Cooperatives and Provider Networks, which are similar to trusts but operate under fewer legal requirements. Public employers interested in pursuing joint purchasing should explore such state-specific options.

SIGNFICANT SAVINGS

In 1993, a city and county with a total of 1,400 employees decided to jointly purchase their life, long-term disability (LTD), dental, medical and prescription drug plans. They saved more than $210,000 in premium and administrative fees in the first year alone.

In 1994, the local school district with 1,500 employees joined the joint-purchasing cooperative and saved $130,000 in first-year costs.

Moreover, the volume discounts resulting from the school district’s participation enabled the two original entities to save an additional $6,000.

And, earlier this year, a county, two cities and the local school district (2,400 total employees) formed a joint-purchasing cooperative for their life, LTD, medical, utilization review and dental plans.

Together they saved the local taxpayers almost $340,000 in first-year premiums and administrative fees. If the school district had joined the other three employers in self-funding its medical and dental plans, an additional $250,000 would have been saved. In 1995, the three employers with self-funded plans intend to use their combined clout and begin direct contracting with health care providers in the community to reduce their medical costs.

* Two large employers, a city and county and a small local community comprising about 1,700 workers formed a joint-purchasing cooperative for their life, medical, preferred provider, utilization review and dental plans. Their current medical and dental plan carrier reduced its renewal proposal by more than 20 percent to retain the business. Total savings on premiums and administrative fees for the three employers are expected to exceed $266,000 in the first plan year of the cooperative.

In all three examples, collective bargaining agreements were in effect and the bargaining units supported the joint-purchasing efforts as an advantage to all parties involved.

PROVIDER CONTRACTING

Still, although the savings experienced by the participants in most cases are significant, they do not include the single most beneficial area for health plan savings: direct contracting with medical providers.

By combining their covered employees and dependents into one large joint-purchasing group, smaller public employers can often reach the size necessary to obtain even larger discounts from doctors and hospitals, either through direct contracting or by becoming large enough to qualify for PPO rates.

“Smaller entities can combine to reach the employee volume that larger operations have that qualifies them for reduced rates from doctors and hospitals. Health care providers give discounts in exchange for more business,” Robinson says. Over time, savings through direct and/or PPO contracting can far surpass those from the initial joint-purchasing administrative and other overhead cost savings.

Where, for instance, after the first group of employers implemented jointly-purchased administrative services and insurance coverages, it introduced a voluntary PPO option for its self-funded medical plans. First-year savings from this decision are expected to exceed 5 percent of claims or almost $300,000.

IMPLEMENTATION REQUIREMENTS

Certain criteria are necessary to implement a successful program. For example, there must be:

* Cooperation. An atmosphere of trust among participating plan sponsors must exist. If employers are unwilling to cooperate and make decisions for the common good, joint purchasing is very difficult, if not impossible, to introduce and implement.

* Uniform Medical-Plan Funding. Involved employers must have similar funding arrangements for their medical and dental plans. Combining self-funding with fully insured or minimum premium plans will not work.

Group term life and LTD are ideal ways to initiate joint purchasing because these benefits are almost always fully insured. Health and dental coverage can be added later.

* Union Involvement. If collective bargaining units are covered by the plan(s), union representatives should be included in the process from the outset. Employers should determine the degree to which the union should be involved, as sometimes the union representatives can hinder the process.

“Sometimes they can run the risk of the union not cooperating, or disagreeing with the options, and that would complicate the situation,” Robinson says. However, if presented properly to the membership, joint purchasing can be recognized as beneficial for both labor and management. Involving the bargaining units in all phases of the efforts is vital to gain their active and continual support.

* Strong Leadership. It is ex-tremely helpful to have a dedicated leader, preferably an elected official, to promote and guide the joint-purchasing project. City council representatives or other officials can better interpret and market the plan to the officials responsible for authorizing its funding and, ultimately, approving its implementation.

Also, by addressing health care cost issues in their own communities, elected officials, career service employees and labor officials (if collective bargaining applies) earn support from their constituents for implementing a creative solution that promotes partnership among regional public-sector employers, and may serve as a model for private-sector employers.

Once a public joint purchasing arrangement is in operation, other government entities in the immediate area can join the collaboration with little additional work or expense. Additionally, if health care reform at the federal or state level eventually encourages joint purchasing, public employers who have already begun will be closer to compliance with state and federal requirements.