A new target for cost cuts: working couples - medical insurance

A new target for cost cuts: working couples

Here's a cost containment measure you may have overlooked: trimming reimbursements for dual-income couples with separate plans.

A simple way to pare insurance bills is being overshadowed by the grand schemes for cutting health care costs. The method: Trimming reimbursements for dual-income couples with separate plans.

By some yardsticks, this may be seen as a strategy of inches. Those inches can quickly add up, though, as employers are forced to foot the huge costs of dependent coverage. With health care inflation raging on and with 40 to 60 percent of benefit dollars going to cover dependents, enthusiasm for the idea of cutting back on reimbursements is growing.

"If an employer is concerned about rising health care costs --and who isn't?--this step is purely defensive. You don't want to pay the bills another company should pick up," says Joseph Martingale, a principal of Towers, Perrin, Forster & Crosby, New York City.

Employers are grappling with a number of approaches that will roll back reimbursements. Some are even scouring for ways to keep working spouses out of benefit plans entirely. Regardless of the approach, the goal is to end the free ride for working couples.

Here's a closer look at how some companies are changing the way they structure and pay for health care benefits for working spouses.

The newest approach--and perhaps the most controversial--is called "carve out," which caps what secondary plans will pay.

Martingale of TPF&C explains carve out this way. "Say a child's medical bill came to $4,000, of which the primary plan paid 80 percent after the $100 deductible was met. This amount totaled $3,120. Under the old system of coordination, the secondary plan, which also paid 80 percent of expenses, would pick up the remaining $780."

Under carve out, in this example, the secondary plan doesn't have to pay the $780, Martingale explains. Since the secondary plan if primary would have paid 80 percent of the amount, and the primary plan already met that percent, no further payment is necessary.

Carve out logic

The logic behind this complicated formula is simple: If working couples share some of the cost, they'll become more prudent purchasers of health care. With 100 percent reimbursement, dual-income couples had no stake in keeping costs down, experts say.

"If plans pay less than 100 percent, people feel more of the effects of treatment decisions," Martingale argues.

Carve out also lessens some of the inequities created by dual coverage.

Only a handful of companies are slicing reimbursements this way and results on savings aren't in. But the momentum behind this trend is building up. "In the future, no one will willingly pay more than the richest plan pays," predicts Jim Nelson, a partner with Hewitt Associates in Lincolnshire, Ill.

State action

Much of the momentum is being spurred on by the National Association of Insurance Commissioners, a non-binding advisory group of state regulators. The NAIC recently drew up model legislation that included a carve out provision. It has been approved by eight states--Indiana, Kentucky, Minnesota, New Hampshire, New York, Tennessee, Utah, and Wisconsin.

Although exempted from most state insurance laws, self-insured plans also are using the carve out method, says Dave Repko, a consultant with TPF&C in Cleveland. "An increasingly important part of the carve out approach is that it discourages people from having dual coverage. Those with self-insured plans are just as interested--and perhaps even more so--as other employers to stop duplication."

In states that haven't approved the NAIC model, a patchwork system of laws determines how much secondary plans pay. Some states use the traditional coordination of benefits model, which allows up to 100 percent reimbursement.

Shifting costs

Another way to trim reimbursements is to use the birthday rule, which determines the primary plan for dependents. Under this rule, the plan of the parent whose birthday comes first in the calendar year is primary. In cases of divorce, the parent who has custody is primary, but the birthday rule applies to parents who have joint custody.

Under this rule, employers, in theory, will pick up the tab for dependents only half of the time. Under the old gender rule, the father's plan was primary, which meant that male-dominated companies paid for almost all of employees' dependent medical costs.

"The gender rule was seen as sexist; it also discriminated against employers with male-dominated workforces," says Dick Wright, group insurance manager of Caterpillar, Inc., Peoria, Ill. "The birthday rule recognizes the changing demographics of the workforce and also spreads the cost more evenly among employers."

All but 12 states--Georgia, Hawaii, Idaho, Maine, Maryland, Massachusetts, Mississippi, New Mexico, South Carolina, Vermont, Virginia, and West Virgina--have approved the NAIC birthday rule. However, this is largely a de facto recognition of what many employers do anyway.

Carve out and the birthday rule, while promising, don't staunch the flow of dollars spent on spouses and dependents. Pummeled by rising health care costs, a number of companies are drafting other strategies for the future.

Raising premiums

One option would increase the contributions employees pay to cover their spouses and dependents. Raising premiums is not a new idea, but the size of the increase will be, says Bob Sears, director of health care planning for Owens-Corning Fiberglas, Toledo, Ohio. "Now dependent coverage costs 10, 20, 30 percent more in out-of-pocket monthly expenses for employees. In the future, employers may charge the full cost of the premiums to employees.

"This takes away the cost advantage of couples' having dual coverage. One drawback is that employees whose spouses don't work will pay more for coverage."

Adds Kathy Zander, administrator of benefits compliance for Boise-Cascade, Boise, Idaho: "I can see small employers having to charge spouses up to the full cost of the plan. With higher premiums, many people will opt out of plans."

Raising contributions isn't the only way to keep working spouses off benefit rolls. Increasingly, employers will tighten eligibility rules, says Sears.

Restricting coverage

One employer who has taken the lead--and some criticism--as a result of its restrictions on health plan eligibility for married employees is Dallas-based J.C. Penney. Its plan covers a spouse only if the employee is the family's principal wage earner.

In 1971, Penney looked at the medical expenses of its largely part-time workforce and realized its liability was high. Many employees worked just a few hours a week, but used medical benefits as much as full-time employees. Penney also noticed that many employees weren't the primary wage earners of their families. In response, the head-of-household provision was begun. It's still in effect today.

Penney's plan is not without controversy. Three discrimination lawsuits have been brought against the company, the most recent one last year. In all cases, the courts ruled in favor of the retailer.

"A lot of negative things have been said about our plan," muses Randy Scott, manager, health care costs, J.C. Penney. "But it works for us. We're not saying that all employers should have this type of plan. It must be assessed in light of your corporate culture, legal considerations, and workforce."

In the future, more and more employers will be taking a hard look at Penney's plan and ones that are similar, say experts. With health care costs going through the roof, many employers will feel they have no choice but to introduce measures restricting the coverage of working spouses.

Spouse buy-offs

A few employers feel that the day of reckoning is just around the bend. Listen to what the president of a small electric products distributor in Ohio, who asked not to be identified, has to say.

"We're getting strangled by the rise in health care costs. In March, our premiums increased 35 precent; that's like adding two high-salaried employees to the payroll and getting nothing in return," he argues. "We can't increase the price of products; we can't change the insurance plan for employees because we're unionized. What options do we have but to refuse to cover working spouses?"

This company hasn't taken such a dramatic step, nor does it plan to soon. But it is providing cash incentives for spouses and dependents to opt out of its benefits plan. Nearly 10 percent of employees have accepted the offer.

As managers grope for ways to ease the insurance crunch, incentive plans like this one may receive more attention, say experts. But a word of caution: Adopting such a step won't sit well with other employers.

"Nothing gets me madder than when some companies always try to be secondary plans. When you offer cash instead of benefits, that's what you do," argues Jim Svec, group benefits administrator for Alcoa, Pittsburgh. "Companies must pay their fair share."

Employers who take such a hard line on benefit cutbacks also risk alienating their employees and hurting their ability to recruit top workers. Valued employees may flee to companies offering generous packages for working spouses.

Unions, too, are concerned about efforts to curb health benefits for working spouses. "This is just another way that companies are trying to cut back on health insurance benefits," says Karen Ignani, associate director of the department of occupational safety and social security, AFL-CIO. "Many local unions are quite concerned about the implications of many of these strategies, but we haven't figured out the best way to respond."

With employers balking at picking up the tab for working spouses, battle lines over who gets stuck with the bill may be drawn soon, say some experts. Some employers already are crossing swords; others are searching for ways to retreat.

"Ultimately, employers may say their only responsibility is to cover their employees," observes Sears of Owens-Corning. "Working spouses will have to take only the plan their employer offers--regardless of quality and price. Companies may have no choice but to take such drastic measures."

COPYRIGHT 1989 A Thomson Healthcare Company
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