Volume 3, No. 2
April 2007

Visit the ReStore

Diane Gilson, CPA
Local Entrepreneur
Diane Gilson, CPA

Ypsilanti Chamber of Commerce President Diane Keller
Meet the new
Ypsilanti area Chamber
President Diane Keller

Small Business
And the Internet
by Mike Gould

Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Health Care Cost
Reform Discussion

Mark Fendrick, MD, a professor in the U-M Medical School and School of Public Health, also is co-director of the U-M's Center
for Value Based Insurance Design.
Mark Fendrick, MD, a professor in the U-M Medical School and School of Public Health, also is co-director of the U-M's Center for Value Based Insurance Design.

By Kate Kellog

Whether it's the subject of scholarly articles or campaign promises, the high cost of health care is always a hot topic. Employers say health insurance is cutting deeply into their profits and employees bemoan increasing out-of-pocket costs. The number of uninsured Americans has reached 46.6 million, according to the U.S. Census. As the 2008 presidential campaign starts to gear up, declared candidates are already proposing broad health care reform plans.

Governors of both parties also have proposed health care plans for their states that combine private and government insurance programs. Here in Michigan, Governor Granholm's Michigan First Healthcare Plan would provide health care to half of Michigan's 1.1 million uninsured population through a public/private partnership.

The plan is awaiting federal approval. Other proposed solutions range from nationalized health care to consumer-directed health plans, which aim to hold down costs by giving consumers more control - and responsibility - over their health care plans through pretax savings accounts.

Some companies are taking a very different approach, one that recognizes that across-the-board cost-sharing may not save money in the long run. These companies offer lower copays and even free drugs---such as blood pressure and diabetes drugs--- to patients most likely to benefit from such medications. The concept of Value-Based Insurance Design acknowledges patient heterogeneity and recognizes that patient cost-sharing should be a function of the value that a specific service provides to a specific patient.

"We think that for any given amount of money, Value-Based Insurance Design can create a package that achieves greater health benefits for that amount than any existing alternative," says A. Mark Fendrick, M.D., a professor in the U-M Medical School and School of Public Health. "A number of southeast Michigan companies have indicated they are interested in moving forward with VBID programs."

Help for the Uninsured
But in a gloomy economy, many cash-strapped small businesses respond to ever-increasing insurance premiums by shifting more of the burden to employees or dropping health benefits altogether. That leaves more employees, who can't afford higher out-of-pocket costs, out in the cold.

For each one percent increase in premium rates, over 150,000 more people become uninsured. Although health care spending increased by 57 percent during the 1990's, the number of uninsured Americans increased by 23 percent due to a 53 percent increase in the average premium cost. That 's a finding of a study by a research team that included Michael Chernew, former U-M professor of health management and policy (now a Harvard University professor of health care policy.)

More uninsured citizens ultimately means more uncompensated emergency room care---which in turn exacerbates the cost problem for small businesses, notes Rob Fowler, executive director of the Small Business Association of Michigan.

"When an uninsured person receives free emergency room care, that's uncompensated services for the hospital," Fowler said during a recent SBAM podcast interview about the Michigan First Health Care Plan. "Our premiums in turn go up to cover those costs. That continues the downward spiral: the higher the premium, the more uninsured we have in the state, and the more people who show up at hospitals for uncompensated care. The problem of the uninsured is definitely a small business problem."

Fowler chairs the Michigan Health Insurance Access Advisory Council, a nonpartisan group formed to address Michigan's health care problems, the uninsured in particular. The council includes a diverse mix of representatives from business, labor, health care organizations, nonprofits, and private insurers. Fowler noted that the council will continue examining this public policy issue well beyond changes in administrations and legislatures.

"I've concluded that the political will is not there to fix the problems of small business or hospitals' lack of compensation for services," he says. "But I think the will is there to fix the problem of the uninsured."

If the Michigan First proposal materializes, about 550,000, or about half of the state's uninsured, will receive coverage. The initiative would help fill the gap between those who are Medicaid-eligible and those whose incomes do not quite qualify them for public assistance. The program will be targeted at uninsured individuals at or below 200 percent of the federal poverty level and include a sliding scale for cost sharing. Health insurers, including Blue Cross/Blue Shield of Michigan, would design plans within state-established guidelines. Those plans would be available to small business through a state-run "exchange."

The Granholm administration is now awaiting word from the federal Centers for Medicare and Medicaid Services about when and if federal funding will be available for the program.

The National Picture
Nationwide, growth in health insurance premiums has moderated in each of the last three years, according to a national survey of employer-sponsored health insurance conducted by the Kaiser Family Foundation and the Health Research and Educational Trust. The cost of employee health care coverage rose 7.7 percent this year, compared to 9.2 percent in 2005.

Nevertheless, Drew Altman, president of the foundation, told the New York Times (Sept. 27, 2006), "Nobody is celebrating. Businesses and workers are still being slammed year after year by rising health costs."

In 2006, the average annual cost of health care for employees in this country was $2,973 per family, according to the Kaiser survey. Employers (with three or more workers) spent an average $8,508 on health benefits per family last year, for a total of $11,481. And overall premiums continue to increase much faster than rate of inflation or wage gains (3.5 and 3.8 percent, respectively).

Moreover, premiums have risen 87 percent since 2000 while inflation has risen 18 percent and wage growth, 20 percent. Also during this period, the percentage of employers offering health benefits has fallen from 69 percent to 61 percent. Less than half of very small firms (3-9 workers) now offer any health benefits, the Kaiser survey reports. Premium increases are not the only part of the cost picture. In addition to premium contributions, most workers face copayments for doctors' visits and prescription drugs. Many of those in Preferred Provider Organizations (PPOs) must meet deductibles before many plan benefits are provided. All consumer-directed health plans associated with a pretax savings option, such as a Health Savings Account, have high deductibles---an average $2,247 per family---but lower premiums.

Some Good News from the Blues
For Michigan employers and employees, about the only good news is that Blue Cross Blue Shield of Michigan's small group rates have moderated from the double-digit hikes of the early 2000s. Rate increases for the small group market this year average 8.9 percent statewide and about seven percent in the Ann Arbor area, according to Christine M. Farah, BCBSM vice president for middle and small group sales.

"Although health care costs are rising by about 11 percent, the Blues have managed to keep rate increases below that level, due to some investment income from subsidiary companies," Farah says. "And prescription drug cost trends also have started to come down a bit."

The Blues' more competitive rates may also be due to passage of the 2003 Small Employer Health Market Reform Act, which established a base health insurance rate for Michigan's small group market. Among other changes, the act allows the nonprofit BCBSM to use age and industry as rating factors and to require a larger percentage of a firm's lower risk employees to participate. "It may be a few more years before we see the full impact of that reform," says Farah. "Right now, we're looking at the need for collaboration between consumers and our health plans to ensure that members are aware of cost implications."

She points to a new BCBSM program, Healthy Blue Living, as an innovative way to involve consumers in their health care. The HMO rewards people for adopting healthy lifestyles and could save employers ten percent in premiums, according to BCBSM. The program offers two benefit levels: standard and enhanced. All employees begin in the enhanced package which offers lower copays and deductibles.

To remain at the enhanced level, they must complete a health risk appraisal, plus another form with their primary care physician. Points are awarded for favorable results in six categories, ranging from blood pressure to weight. (Children of "enhanced " members are automatically included in that level.) Even if a member does not achieve their goal, they may remain at the enhanced level if they agree to follow a treatment plan with their physician. Employers are required to provide a smoke-free environment in order to purchase the product. Privacy of information is ensured for all plan members.

"This is one way of making sure both employers and employees buy into the concept of consumer responsibility for making healthy lifestyle choices," says Farah. "We expect employers in the plan will see a reduction in absenteeism." About 18,000 members have enrolled since the program began last October, she adds.

Barely Holding On
Despite lower Blue Cross rates, all is not well with employer-based health insurance in Michigan. The state's 2006 Employer Health Insurance Survey reports that of the 1,261 employers surveyed, 40 percent do not offer any employer health insurance. About ten percent of Michigan employers who do may not do so next year, mainly due to rising premium costs. That compares to six percent of the more than 3,000 employers who responded to the Kaiser nationwide survey.

Of those Michigan employers who do plan on continuing health benefits, most intend to shift more of the cost of premiums to employees.

"They're holding on by their fingernails," says Scott Lyon, SBAM vice president for small business services. "At a time when the economy is not doing well, the rate of increase for health insurance is two or three times that of inflation. "

One section of the state survey that shocked nearly everyone was the employers' response to the question about the impact of health insurance on employee recruitment and retention. Nearly 60 percent of the employers said it had no impact on recruitment and 61 percent said no impact on retention. According to conventional wisdom, those are among the chief reasons that employers offer health benefits.

Those responses may indicate a "tipping point" in the tradition of employer-sponsored health insurance, Rob Fowler noted when he presented the survey results at a February forum at Michigan State's Institute of Public Policy and Social Research.

Lyon agrees those survey results are "eye-opening" but don't necessarily mean Michigan's days of employer-based health insurance are numbered. "We do see a decline in the number of groups offering insurance because they can simply no longer afford it. And many newly formed companies are not offering health plans in the first place."

More and more people are seeking coverage through individual policies, he adds. "As you watch the activity level inside carriers, you see a lot of the investment is on the individual side of their business."

Consumer-Directed Health Plans
Many business groups, as well as the Bush Administration, have been supporting so-called consumer-directed health plans (CDHP) as a way to hold down costs and give consumers more say over their health care. Typically paired with a high deductable---usually more than $2,500 per year for families---these plans offer a pretax savings account for qualified medical expenses. Such plans include Health Savings Accounts, Health Reimbursement Arrangements, and Section 125 Plans/ Flexible Spending Accounts. Some are employer-funded, some employee-funded, and some allow both employer/employee contributions.

Proponents of CDHPs say programs such as Section 125 Plans/Flexible Spending Accounts save money for both employee and employer. The pretax accounts reduce employers' FICA tax liability as well as employees' federal and state income taxes. And employees can reach into their accounts at any time to reimburse themselves for uncovered medical expenses. The SBAM, which administers CDHPs, sees enrollment in those programs gaining momentum, says Lyon.

During one of the SBAM's weekly podcast interviews, Gary Kushner, owner of Kushner & Co., a Kalamazoo-based employee benefit consulting and administration firm, outlined the advantages and disadvantages to CDHPs. Such plans, he said, are not good ones for the chronically ill. "If I have a condition that requires high medical bills, even with an HRA or HSA, I'm going to blow through a lot of out-of-pocket expenses before I reach the high deductable."

His conclusion: As with any benefit design, the business owner must weigh the overall costs of a CDHP against coverage levels to determine if the plan provides a meaningful benefit to employees.

A Value-Based Alternative
U-M's Mark Fendrick is all for containing health care costs---but not in a way that limits utilization of essential clinical services. The current trend of across-the-board cost sharing, he says, will not save money in the long run if it prevents people from seeking the medical care they need. He cites a growing body of evidence that shows patients decrease use of life-saving health care---such as cancer screening and prescription drug use--- when faced with high out-of-pocket costs. As a result, their adverse health outcomes may require costly emergency room visits and hospitalization.

Fendrick is co-director of the U-M's Center for Value-Based Insurance Design. VBID offers a potential solution to the health care financing dilemma by inserting value of services into the current dialogue. "It encourages the use of services when the clinical benefits exceed the cost and likewise discourages the use of services when the benefits do not justify the cost," explains Fendrick, along with colleagues Michael Chernew and Allison Rosen, an assistant professor in the U-M Medical School, in one of their publications on VBID. In this model, the more clinically beneficial the therapy for the patient, the lower that patient's cost share would be. In business terms, a good benefit plan should yield as much health care for the dollar as it can, and maximize dollars spent. "You don't always come out ahead by buying the cheapest car or paying employees the lowest possible wages," says Fendrick. "Likewise, we should start shifting our thoughts toward value in health benefits."

Today, beneficiaries are being asked to spend more on both high- and low-value services, he says. (Examples of low-value services might be total body CT screenings or remedies for male-pattern baldness.) VBID would create benefit packages that cover highly effective services, such as blood pressure medications for heart patients or colonoscopies for people over age 50. Services of lesser values would require higher patient contributions.

"Unlike one-size-fits-all plans, VBID recognizes clinical nuances," says Fendrick. This approach to health benefits should bring a greater return on investment than expensive, broad-based disease management programs whose cost may be out of reach for some patients. Fendrick and his fellow researchers acknowledge that VBID may pose perceived drawbacks to employers. Those include costs of implementation, privacy concerns, and failure to capture long-term savings due to employee turnover. The researchers say many of these barriers could be surmounted by simplifying or customizing a VBID plan to accommodate individual situations.

In fact, a number of organizations already have successfully implemented various forms of VBID. Pitney Bowes (Stamford, Conn.) and ActiveHealth Management (New York, NY) have lowered copays for all users of certain drug classes. The city of Asheville, N.C., has for ten years offered selected services and drugs at lower copays for employees with diabetes mellitus. The city recently added free drugs for asthma, blood pressure, depression and cholesterol problems, according to the New York Times (Feb 21, 2007). Eastman Chemical (Kingsport, Tenn.) has offered free mammograms as well as free drugs for diabetics and free vaccines for employees' children.

Smaller companies also stand to benefit from practicing varieties of VBID. Targeting patients who could benefit from certain drugs and tests need not be cost-prohibitive, says Fendrick. "There are certain low-lying fruit, such as patients enrolled in disease management programs or certain conditions easily identified from either medical or pharmacy claims."

The U-M last summer began offering free or low-cost diabetes medications to employees and dependents who have any form of the disease. Called MHealthy: Focus on Diabetes, the program was the first in the nation to evaluate the impact of targeted copay reduction for preventive medications. So far, it has saved participants more than $100,000 in copays, according to the U-M.

Companies in southeast Michigan who are interested in adopting a VBID should attend a free symposium on that topic sponsored by the U-M Center for VBID. "Value-Based Insurance Design: Bridging the Divide Between Quality Improvement and Cost Containment" will be held, free of charge, May1 in the Michigan League Ballroom on U-M's Ann Arbor campus. The symposium runs 8 a.m.-4 p.m. and includes a continental breakfast and lunch. Mark B. McClellan, MD, former administrator for the Centers for Medicare and Medicaid Services, will be the keynote speaker. Executives from companies experimenting with VBID will share their experiences.