Employers Push Health Insurers To Get Breaks on Their Rates
09/24/2003
By VANESSA FUHRMANS
Staff Reporter of THE WALL STREET JOURNAL As companies continue to shift more of their soaring medical costs on to workers, they're also pushing back against steeper increases from insurers and winning better terms than in years past. The tougher negotiating stance appears to be working, although employers still bemoan the big jumps in insurance rates. After six years of ever-higher premium jumps, average 2004 rate increases have slowed. When health insurers submitted 2004 proposals to companies this spring, premium increases averaged 17.7%, according to a survey of nearly 140 employers by benefits consultancy Hewitt Associates, of Lincolnshire, Ill. But by August, employers had negotiated rate increases down to 11.5% on average, compared with the 17% increase they settled for a year ago. What is giving many employers leverage in winning lower premium increases is a moderation in medical-cost growth. Health-care inflation has been slowing since late last year, as new policies with higher co-payments and deductibles have curbed use of expensive drugs and discouraged elective hospital procedures. The arrival of over-the-counter Claritin and generic versions of other popular treatments also have held costs down. Managed-care companies, the biggest beneficiaries of this trend, have been reaping double-digit profit increases for much of the past year. But as health-care benefits become the contentious focus of many labor talks this year, more employers are successfully demanding that insurers pass on some of the relief or they'll take their business elsewhere. "Last year, everyone was screaming about hyperinflation in health care," said Steve Lewis, head of sales and marketing at Fitzmaurice Cos., a New York employee-benefits consultancy. "This time there's a lot more willingness from insurance carriers to give. There's more focus on keeping market share." The trend isn't likely to translate into much benefit for consumers anytime soon. Many employers won lower rate increases in part by heaping more deductibles or co-pays on employees. And despite driving harder bargains, most employers continue to see their premiums rise at a double-digit pace, several times the rate of overall inflation and workers' earnings. For example, insurers to California Public Employees' Retirement System, the country's second-largest public purchaser of employee benefits, initially sought a 31% premium increase for the year after a 24% increase in 2003. Calpers negotiated rate increases down to 16.4% and 18% with Blue Shield of California, Kaiser Permanente and Western Health Advantage, in part by introducing higher co-pays and disease-management programs for patients with chronic illness. But Calpers also brought the rate increase down by strategically delaying bid approvals until June. "We'd noticed that the [health-care] cost trend was improving," said Clark McKinley, a spokesman for Calpers. "We knew by June we'd have better numbers to show" in negotiations. Despite the lower premium increases, 27 public agencies with a total of 36,500 employees -- about 3% of Calpers' 1.24 million health-plan participants -- still pulled out for a cheaper deal elsewhere. One is the city of Pasadena. With $14 million in annual health-care costs and still reeling from a 24% premium increase the year before, "we were ready to get out," said Karyn Ezell, head of the city's human resources department. Pasadena hasn't officially decided on an insurer, but Ms. Ezell said the city expects to pay $650,000 less than it would with Calpers, and for the same kind of plan it has this year. Some California municipalities are finding better deals with insurers such as Health Net Inc., Woodland Hills, Calif., and PacifiCare Health Systems Inc., Cypress, Calif., which Calpers dropped last year because it thought their rates were too high. Eager to gain more customers in the competitive Southern California market, many insurers are wooing disenchanted municipalities with plans nearly identical to that of Calpers. "The insurers really sought us out," Ms. Ezell said. "They've been more than willing to talk and work something out." That marks a big shift from last year, when major insurers were willing to sacrifice business to shore up profitability and make sure premiums stayed ahead of fast-growing medical costs. This time around, the sustained slowing in health-care costs gives insurers extra cushioning to be more flexible even with smaller clients. One such company is closely held DealerTrack Inc., a Melville, N.Y., a company which describes itself as an online auto-financing platform provider with 130 employees. Its insurer, UnitedHealth Group Inc.'s United HealthCare, originally proposed raising its rates 32%. After shopping around for other plans DealerTrack negotiated the rate increase down to 19.3% without paring back its employee health plans. "We felt we got it to at least a point where we could manage the increase," said DealerTrack's chief executive, Mark O'Neil. Changing health plans is a hassle for companies and their employees, but more employers say they have no choice but to shop around. American Electronic Components Inc., sold to a private equity firm by auto-parts maker Dana Corp., is doing that because it anticipates a rate increase of 65% from its carrier, United HealthCare, of Minnetonka, Minn. The company's rates are likely to soar largely because it no longer is part of Dana, where as a larger group, it got a better rate. "We would be looking at health-care costs eating 10% of our sales," said Ron Cerny, American Electronic Components' chief executive. "That's just not workable, for me or the employees." The company continues to negotiate with United HealthCare but is talking to other insurers. Investors and analysts say that, after a highly profitable 2003, the more-aggressive pricing by insurers may begin to squeeze their profit margins, though not significantly until 2005. Ellen Wilson, an analyst at Sanford Bernstein, says, "2004 will be the inflection point for a lot of companies." Smaller rate increases aren't necessarily bad for insurers, she adds. But maintaining profit growth will depend on the industry accurately pricing premiums to underlying costs and remaining willing to sacrifice membership growth to bad business. "I don't know if the industry is that disciplined," she says. "It hasn't been in the past." Companies ahead of the pack in slowing costs, such as United HealthCare, Wellpoint Health Networks and Aetna Inc., should be best positioned in the tougher environment, Ms. Wilson maintains. Aetna so far has been the industry leader in slowing the increase in its medical costs, reducing the rate to 7% in the second quarter of this year from 15% a year earlier. Even with some pressure on premiums, said Aetna Chief Executive John W. Rowe, "we can more than make up for it in cost savings and increasing new business."
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