Rising Health Care Costs Take a Toll in Orange County
Orange County employers were hit this year with hefty increases in health insurance premiums as the cost of medical care careened out of control.
More of the same is expected in 1989, as new technology, increased private-sector funding of indigent care, the widening AIDS epidemic, and greater demand for treatment of mental illness and drug and alcohol abuse contribute to escalating health-care expenses.
As a result, companies are taking steps to constrain future medical claims, such as contracting with health maintenance organizations or preferred provider networks and promoting wellness programs.
But for the most tangible results, many firms are simply requiring their workers to shoulder a bigger share of the cost.
Many companies are making employees pay a portion of medical insurance premiums, in some cases for the first time. In addition, many are boosting the deductible amounts and co-payments made by employees before insurance begins to pick up the tab.
No matter what form it takes, cost shifting is taking a bigger bite out of employee paychecks.
“The ones who ultimately pay for these increased costs are the employees,” said Michael Fox, managing consultant in the Costa Mesa office of Foster Higgins, a medical-benefits consulting firm.
“In the past, most companies had the ability to shift these costs to their customers by increasing the cost of their products,” Fox said. “But that is very difficult to do now because of world competition.”
Carolyn Miller, legislative representative for the National Federation of Independent Businesses, said the organization’s surveys have consistently found medical benefits to be the No. 1 concern of small business members nationwide, eclipsing other issues such as liability insurance and workers’ compensation.
In 1988, the cost of worker medical benefits rose nationally by about 18%, following increases of about 8% in 1987 and 7% in 1986, according to the Foster Higgins annual health-care benefits survey.
Consultants say the cost of medical benefits rose even more dramatically in Orange County. Reasons include the area’s comparatively high cost of medical care, the generous benefit packages offered by many area employers, and an abundance of small firms that have difficulty bargaining with insurance carriers for the best rates.
As medical benefit plans are renewed, Fox said, he is seeing premium increases ranging from about 20% for companies with more than 1,000 employees to as much as 50% to 70% for small firms.
Kim Kimmerle, chairman of PM Group Life in Fountain Valley, an employee-benefits subsidiary of Pacific Mutual Life Insurance Co., said his company increased health premiums to its insured corporations by 25% to 50% this year, based on their claim experience.
“I would anticipate that we would go back in ’89 to our policy holders, asking for another 20% increase in premiums--and that is not a very pretty picture of American business,” Kimmerle said.
Del McBride, president of Communications Workers of America Local 9510, said attempts to shift more of the cost of medical benefits to employees “could easily be a strike issue” in 1989 when area labor contracts are renegotiated with AT&T;, General Telephone and Pacific Bell.
Bill Perry, executive secretary of the Orange County and Vicinity District Council of Carpenters, said the rising cost of medical benefits for his members is “eating us up alive.”
In 1988, Perry said, the cost of funding the carpenters’ health benefits rose to $2.25 of a worker’s hourly wage, up from $1.75 an hour in 1987. Next year, he said, the benefits will cost another 20 cents an hour.
Company officials say they are increasing employee contributions for medical benefits in part to persuade workers to make more judicious use of medical treatment and to take better care of their health.
“I think by asking employees to pay for a portion of the benefits, there is an incentive for the individual to utilize the programs appropriately, and they begin to understand how expensive benefits are,” said Cheryl Masters, corporate-benefits manager for National Education Corp. in Irvine. “When you give them (benefits) away, they are sometimes perceived to be of no worth.”
Employees of small firms often are being asked to make the biggest sacrifices to preserve their medical benefits. That is particularly true if one or more of their co-workers or dependents become seriously ill.
Laurie Murphy, payroll and group benefits administrator for Energy Production & Sales, an oil production company in Tustin with 30 employees, said she expects that the company’s monthly health benefit premium will soar from $335 per family to as much as $600 next year.
Murphy said her company has been hard-hit by claims of the wife of an oil field worker who stopped working for the company in November. Under federal law, the company must continue for 18 months to provide insurance for the wife, who has cancer. As of October, Murphy said, the wife already had accumulated $50,000 in claims.
Murphy said the company has six brokers searching for a more economical medical benefit plan, but “no other insurance company will take you when you have a person with so many claims.”
As a result, she said, the firm probably will increase the deductible amount that its employees must pay from $200 to $500 per person, or contract with a health maintenance organization.
For some employees, HMOs are no longer simply an option. Next year, Alcoa/TRE, an Irvine aerospace company with about 1,450 employees, will begin requiring all new employees to enter an HMO for the first year.
After a year, they can switch to a more traditional indemnity insurance plan that allows them to choose their doctors, who will be reimbursed for services, said Bob Walker, director of human resources for the company.
Since Alcoa/TRE began offering HMO coverage to employees as an option in 1985, Walker said, about half the work force has chosen to use them.
And not all employees are being treated equally by insurance companies.
Several years ago, insurance companies would accept corporate groups by looking at their overall claim experience, according to Wade Olson, president and owner of Fringe Benefit Planning, a Newport Beach brokerage of employee benefit plans for small and medium-size employers.
Today, he said, they are frequently refusing to take individuals within a group if they have ongoing medical problems such as AIDS, cancer or heart disease.
“It is getting harder and harder to find a marketplace for a group with a large claim--in some cases impossible,” Olson said. “It is getting to the point where a company may have to make a decision in the best interest of the firm as a whole versus the individual.”
In some instances, he said, companies are buying new policies that exclude certain employees and their dependents. Those people must then seek alternative insurance, usually with reduced benefits and at higher cost.
Tom Hickin, an insurance agent in Brea who caters mostly to very small businesses, said his customers increasingly are deciding to obtain “peace-of-mind policies” designed to cover catastrophic illnesses but not routine medical care.
Hickin said he recently sold such a policy to a man who runs a child-care center. Rather than see his monthly premium increase from $278 to $318, he decided to replace his existing medical plan with its $250 deductible for a catastrophic plan with a $2,000 deductible. The new monthly premium is $178.
Kimmerle, the PM Group Life executive, said that employees increasingly are being asked to choose benefits that best fit their needs and their pocketbooks through “flex benefit plans.”
An older person, for instance, might choose not to be covered for maternity care or orthodontics, he said.
An even more basic approach to curbing medical costs, Kimmerle said, is for companies to promote the health of their workers by teaching them about diet, exercise, and the dangers of smoking and stress.
Kimmerle is forming a “wellness council” in Orange County under the sponsorship of the Health Insurance Assn. of America, of which the PM Group is a member. In the last 2 years, he said, 25 such councils have been formed nationwide.
In the last 18 months, Fluor Corp., a large Irvine engineering and construction company, has stepped up efforts to improve the health of its employees.
The company is publishing an employee newsletter with a calendar of company-sponsored events such as Weight Watchers meetings. It has begun testing corporate officers as well as job applicants for signs of drug and alcohol abuse.
While trends toward managed health care are “squeezing the fat” out of medicine, they will have limited effectiveness in controlling future costs, Dr. Jerry Sinykin, Fluor’s medical director, said.
“I think there is a gradual recognition that the long-term reduction of costs won’t happen with what has been done to date,” Sinykin said. “The real long-term reduction in costs will come from prevention.”
CHANGES COMPANIES MADE IN MEDICAL PLANS
Percentage of 681 surveyed companies nationwide that made the following changes in their medical plans in the last 2 years:
Increase in Percentage of Premium Paid by Employees 45%
Increase in Plan Deductible 43%
Made Hospital Expenses Subject to Deductible 33%
Made Surgical Expenses Subject to Deductible 27%
Increase in Employee Co-Insurance 23%
Made Hospital Expenses Subject to Employee Co-Insurance 29%
Made Surgical Expenses Subject to Employee Co-Insurance 30% Source: Hay/Huggins Benefits Report 1988 Executive Summary
