Xerox May Pay Workers to Buy Own Insurance

Xerox Corp., frustrated by the cost and hassle of administering its employee health insurance program, wants to abandon its long-standing approach to health benefits and pay workers to buy the insurance of their choice.

Although Xerox, headquartered in Stamford, Conn., has not settled on the shape of the system it intends to put in place, it has begun laying plans for a changeover in as little as five years, company officials said. Other companies large and small are expected to keep a close eye on what happens at Xerox, long a corporate innovator in health benefits.

Like Xerox, many firms are studying ways to overhaul the health care plans they offer employees. These efforts have been triggered by rising health care costs, increased federal and state regulation of health insurers, the likelihood of more exposure to liability--including medical malpractice lawsuits--and growing worker dissatisfaction with choices of health plans and managed health care overall.

Xerox hopes to give all workers $5,000 to $6,000 a year to buy health insurance on the open market. The plan could save Xerox money on administering health care benefits and would limit its exposure to lawsuits from patients injured by a health plan’s denial of care. Employees potentially would get a wide choice of plans and the prospect of pocketing extra cash if they choose cheaper plans.

“We would free up the amount we now spend on benefits enrollment, benefits administration, negotiating with HMOs and quality monitoring,” said Paula Fleming, an official in Xerox’s human resources division. “There’s a lot of costs that are part of the infrastructure that we’re supporting to deliver this health care benefit to employees.

“We would take that money and . . . give [it] to our employees. From the employee standpoint, they get more mobility and flexibility and choice to buy the plan that’s best for them.”

However, in the absence of deep and fundamental changes in the insurance market, the plan could have a devastating effect on less healthy and older workers, who could face higher costs, according to policy experts.

“This could totally unravel American health care,” said Uwe Reinhardt, a health economist at Princeton University. Workers could be left to sort out their health care choices in a complex marketplace, with far less leverage than they have now. Most important, it is unclear whether workers would have access to group coverage, in which coverage costs for the sick and well are averaged out.

Judy Feder, dean of policy studies at Georgetown University, warned that it is essential not to jettison the employer-based health insurance system. In the current health care climate, she said, the number of uninsured rises by 1 million people a year despite a robust economy.

“What’s desirable about the employer system is that we have a mechanism for collecting health care revenues, pooling risk and signing people up for health insurance, and that’s not bad. We lose it at our peril,” Feder said.

Private employer-based health insurance, which covers about 125 million workers, allows older and less healthy workers to pay the same premium as younger and healthier ones. It has the effect of keeping costs down for the older workers at the expense of younger employees.

If employees were free to choose their own insurance, workers at lower risk likely would choose cheaper, bare-bones coverage. In turn, older or sicker workers likely would see their insurance costs rise as they chose more comprehensive plans.

“The young people will get out, and that will deprive the whole system of money,” Reinhardt said.

Furthermore, big companies such as Xerox, which has about 50,000 employees nationwide and 7,500 in California, bargain hard with HMOs to get the lowest possible rates for workers. An individual worker buying health insurance would lack such leverage.

But Xerox executives say that, in this brave new world of health care coverage, the market would work to keep prices down and ensure that only high-quality plans survived.

“The marketplace will sort out the pricing . . . and the HMOs would be publicizing how they stack up against others in the region. You would see them advertising and working to get the quality ratings to attract additional customers,” said Xerox’s Fleming.

Patricia Nazemetz, Xerox’s vice president for human resources, first discussed the proposal last month at a Washington conference sponsored by the Robert Wood Johnson Foundation and the Alpha Center for private and public sector health policy experts.

The plan is tentatively based on giving all employees, whether they have dependents or are single, up to $6,000 a year to buy coverage. They could buy any plan--comprehensive coverage, an HMO, a catastrophic plan or some other type of plan--but for the foreseeable future would have to spend at least some of the money on health care coverage.

The amount they spent on health care would be tax exempt, and any remaining money they could take as taxable cash compensation. Xerox would continue to educate employees about how to choose plans and understand ratings and statistical data on quality, but its role in negotiating rates and monitoring quality and performance would be eliminated.

The system would be implemented in five to seven years at the earliest. The timing would depend in part on how workers react. Many may be leery of such dramatic change. The timetable could stretch out more if insurers, who are now more group-oriented, are slow in coming up with a competitive array of health plans for individuals.

While it was criticized by some academics and health policy experts, the Xerox proposal came as no surprise to benefits consultants and employer groups, who are familiar with the internal debate among employers about how to reduce their financial and legal exposure while continuing to ensure that their workers have health care coverage.

Xerox’s proposal is at the far extreme of employers’ health care options, said Larry Atkins, a health policy and legislation consultant who represents the Corporate Health Care Coalition, a group of 25 of the Fortune 100 firms.

“Other employers are looking at similar things, but there’s a whole bunch of places in the middle between here and there,” he said.

Frank McArdle, a principal at Hewitt Associates, a national benefits consulting firm, said that it would take at least a decade for the market to offer a range of affordable, high-quality plans to individuals.

“There are serious barriers in the individual insurance market that need to be overcome,” he said. “There is no marketplace right now for an individual to take a voucher or cash and apply it. The individual insurance market is not currently structured to handle that.”

An individual now seeking to buy health insurance has few, if any, choices, and frequently prices are set based on the person’s age and health status, sometimes making the insurance unaffordable.