Containing Health Insurance Cost Increases

There's no relief in sight from rising health-care costs. Hewitt Associates, of Lincolnshire, IL, projects that health care costs will increase 15.4% this year, following an average rate hike last year of 13.7%. If this trend continues, Hewitt estimates, health coverage cost will double over the next 5 years.

Law firms coast-to-coast therefore continue to search for their own magic bullets. While doing so, however, they're being careful not to shoot themselves in the foot. Firms see a strong benefits package as critical to retaining and recruiting employees, and therefore take a largely conservative approach to managing health-care costs ' trying to maintain generous levels of coverage while minimizing the financial blow to employees.

Even with similar overall goals, different firms are exploring a variety of solutions. Notable approaches include consolidating multiple plans, focusing on high quality basic coverage, adopting sliding-scale premiums, and experimenting with innovative insurance pools.

Plan Consolidation

For Minneapolis-based Dorsey & Whitney, the rising cost of health insurance was exacerbated by the patchwork of policies it maintained. After years of growth through mergers and acquisitions, the firm found itself with a dozen different insurance contracts across the U.S. With so many smaller bundles of insurance, the firm faced premium increases in some cases of 30% to 40%.

Last year, it decided the time had come to find one plan for all its U.S. employees. “We wanted to find a way to leverage the size and scope of our firm, and also get more consistency in benefits across the firm,” says Patrick Lutter, human resources director.

Another goal was to move from being self-insured to being fully insured. After putting its insurance out to bid, the firm settled on a single, three-tiered plan administered by Blue Cross and Blue Shield of Minnesota. “We put a lot of time and energy into reworking our plans, but it's paid off,” Lutter says. “It's one of those success stories you don't always get.”

Base Coverage Quality

One firm that looks at health insurance from a unique perspective is New York's Martin Clearwater & Bell. “We're a little unusual,” explains Catherine Reilly, the firm's executive director. “We're a medical-malpractice defense firm. Our partners are concerned about what kind of medical care their people receive.”

The firm, with 140 employees, strives to offer high-end plans. Still, it continues each year to shop for the best deal and to consider cost-cutting options. Five years ago, the firm changed providers and dropped the indemnity plan it offered in favor of PPO and HMO options. These changes brought the firm annual savings in the six figures, Reilly says.

More recently, it raised employee co-payment amounts. The firm pays 100% of employee premiums for individual coverage. It pays nothing towards the additional cost of family coverage.

“We've been very lucky,” Reilly continues. While the firm had projected rate increases of between 20% and 30% the last few years, its actual increases have been below 10%. “Every year we look at it, see how we can tweak it. We play with the riders. We play with the co-pay. But we try to make sure the base coverage is good quality.”

Scaling Premiums to Pay

With more than 7500 employees worldwide, Clifford Chance continually reconsiders its benefits and tweaks it plans. “We try to balance what's beneficial to both the employee and the firm,” said Gail Losak, U.S. benefits manager.

Over the past few years, the firm raised its deductibles, changed its prescription drug program, and took steps to encourage staff to purchase drugs through mail order. It also considered changing carriers, but decided to stay with its current plans.

To make the cost of coverage easier to bear for its employees, Clifford Chance determines the amount of their contributions based on a sliding scale tied to income. The scale uses 11 salary bands; the band on which an employee falls determines what he or she will pay for a given type of coverage. Employees can choose either a PPO or an HMO plan, and then elect whether to take individual coverage, individual-plus-one-dependent coverage, or family coverage.

Consortia

Some firms believe they can find strength in numbers, by creating health-care consortia to purchase and administer health, dental and vision coverage. The goal: more favorable premiums, a wider array of plan choices, and lower administrative costs.

The pooling concept gained support from a 2001 survey by the Kaiser Family Foundation, which indicated that larger purchasers negotiated more favorable health insurance rates. The nation's smallest companies, with three to nine workers, saw the largest rate increases, an average of 16.5%. Larger entities saw hikes averaging 10.2%.

The first law firm health-care consortium was formed by five Washington, DC, firms in 1994 and continues to operate. Its members are Dow, Lohnes & Albertson; Finnegan, Henderson, Farabow, Garrett & Dunner; Patton Boggs; Steptoe & Johnson; and Wiley Rein & Fielding.

In 1998, four firms allied in Chicago. Three members remain: Mayer, Brown, Rowe & Maw; Neal, Gerber & Eisenberg; and Ungaretti & Harris.

A third health-care consortium was formed in Atlanta in 2002. Its members are Arnall Golden Gregory, McKenna Long & Aldridge, and Smith Gambrell & Russell.

In San Francisco, five firms have been studying the feasibility of creating a consortium. In Boston and Richmond, VA, firms have met with consultants to consider alliances. However, an attempt 2 years ago in New York to put a group together failed to jell.

A leading exponent of such consortia is William Stanton, managing director of Palmer & Cay, a Savannah, GA-based insurance brokerage and benefits consulting firm. “The consortium is a way in which you allow a law firm with 700 to 2000 employees to join with other firms and therefore replicate the market position of a larger organization,” Stanton says.

The leverage they obtain helps the firms obtain lower costs ' not just for insurance premiums, but also for pooling charges, stop-loss coverage, network access and administration, he said. The larger group also results in elimination of the margin insurers charge to cover claims volatility, which can be as high as 11% of insurance cost, Stanton says.

The proof of pooling concept is in the numbers, Stanton continues. The DC group has seen an average cost increase of 9% since its inception; the market average for the same period was 13%. Chicago has seen a 9.7% average increase, compared to 15.2% for the market. In just a year, Atlanta has seen 13% compared to 16% for the market.

Fork in the Road

Not everyone believes there is a magic bullet. Bernard Schaeffer, benefits director at New York's Shearman & Sterling, sees rising health-care costs as an unsolvable issue for law firms. “I don't see a solution to escalating health-care costs,” he says. “An employer's options are limited.” The only real answer is to pass the costs on to employees, but employers run a risk in doing that, he says. “To adopt a defined contribution approach would be a dramatic change, and would not be well received.”

It was this very issue that led 1600-employee Heller Ehrman White & McAuliffe to consider joining a health care consortium with four other firms, says David Sanders, Heller's chief human resources officer.

“The first thing we did was to make a decision that we would assume more of the cost increase than our employees,” Sanders says. “That is a fork in the road for all companies – to decide whether you'll pass along the costs to employees or bear them.”

Having taken that route, Heller Ehrman opted not to increase deductibles and co-payments. “We decided last year that it wasn't worth it. Our deductibles and co-payments were high enough. People were going to have large enough increases in their premiums.”

Instead, the firm started looking at different plan designs, and, in particular, at the consortium. This was not the first time. Four years earlier, the firm took steps to form a consortium, but found insufficient interest among northern California neighbors. Health care was not the burning issue that it is today, he said. “We've found a much keener interest now.”

[Ed. Note: Consortia can, and may need to, develop incrementally. As of December 2003, the above-described discussions by five Northern CA firms have not generated a full consortium. But HR chief David Sanders reports that Heller Ehrman and another firm have started a two-member consortium with the cooperation of the health insurer both of them use. By pooling their insureds, they've eliminated the carrier's claims-volatility margin (about 5% in their case) and somewhat reduced administrative costs as well. Both firms have even been able to keep their existing plan structures; though it's understood that if more firms join the group ' as is hoped ' then compromising on minor differences between plans will be needed to avoid wasteful administrative duplication.]

There's no relief in sight from rising health-care costs. Hewitt Associates, of Lincolnshire, IL, projects that health care costs will increase 15.4% this year, following an average rate hike last year of 13.7%. If this trend continues, Hewitt estimates, health coverage cost will double over the next 5 years.

Law firms coast-to-coast therefore continue to search for their own magic bullets. While doing so, however, they're being careful not to shoot themselves in the foot. Firms see a strong benefits package as critical to retaining and recruiting employees, and therefore take a largely conservative approach to managing health-care costs ' trying to maintain generous levels of coverage while minimizing the financial blow to employees.

Even with similar overall goals, different firms are exploring a variety of solutions. Notable approaches include consolidating multiple plans, focusing on high quality basic coverage, adopting sliding-scale premiums, and experimenting with innovative insurance pools.

Plan Consolidation

For Minneapolis-based Dorsey & Whitney, the rising cost of health insurance was exacerbated by the patchwork of policies it maintained. After years of growth through mergers and acquisitions, the firm found itself with a dozen different insurance contracts across the U.S. With so many smaller bundles of insurance, the firm faced premium increases in some cases of 30% to 40%.

Last year, it decided the time had come to find one plan for all its U.S. employees. “We wanted to find a way to leverage the size and scope of our firm, and also get more consistency in benefits across the firm,” says Patrick Lutter, human resources director.

Another goal was to move from being self-insured to being fully insured. After putting its insurance out to bid, the firm settled on a single, three-tiered plan administered by Blue Cross and Blue Shield of Minnesota. “We put a lot of time and energy into reworking our plans, but it's paid off,” Lutter says. “It's one of those success stories you don't always get.”

Base Coverage Quality

One firm that looks at health insurance from a unique perspective is New York's Martin Clearwater & Bell. “We're a little unusual,” explains Catherine Reilly, the firm's executive director. “We're a medical-malpractice defense firm. Our partners are concerned about what kind of medical care their people receive.”

The firm, with 140 employees, strives to offer high-end plans. Still, it continues each year to shop for the best deal and to consider cost-cutting options. Five years ago, the firm changed providers and dropped the indemnity plan it offered in favor of PPO and HMO options. These changes brought the firm annual savings in the six figures, Reilly says.

More recently, it raised employee co-payment amounts. The firm pays 100% of employee premiums for individual coverage. It pays nothing towards the additional cost of family coverage.

“We've been very lucky,” Reilly continues. While the firm had projected rate increases of between 20% and 30% the last few years, its actual increases have been below 10%. “Every year we look at it, see how we can tweak it. We play with the riders. We play with the co-pay. But we try to make sure the base coverage is good quality.”

Scaling Premiums to Pay

With more than 7500 employees worldwide, Clifford Chance continually reconsiders its benefits and tweaks it plans. “We try to balance what's beneficial to both the employee and the firm,” said Gail Losak, U.S. benefits manager.

Over the past few years, the firm raised its deductibles, changed its prescription drug program, and took steps to encourage staff to purchase drugs through mail order. It also considered changing carriers, but decided to stay with its current plans.

To make the cost of coverage easier to bear for its employees, Clifford Chance determines the amount of their contributions based on a sliding scale tied to income. The scale uses 11 salary bands; the band on which an employee falls determines what he or she will pay for a given type of coverage. Employees can choose either a PPO or an HMO plan, and then elect whether to take individual coverage, individual-plus-one-dependent coverage, or family coverage.

Consortia

Some firms believe they can find strength in numbers, by creating health-care consortia to purchase and administer health, dental and vision coverage. The goal: more favorable premiums, a wider array of plan choices, and lower administrative costs.

The pooling concept gained support from a 2001 survey by the Kaiser Family Foundation, which indicated that larger purchasers negotiated more favorable health insurance rates. The nation's smallest companies, with three to nine workers, saw the largest rate increases, an average of 16.5%. Larger entities saw hikes averaging 10.2%.

The first law firm health-care consortium was formed by five Washington, DC, firms in 1994 and continues to operate. Its members are Dow, Lohnes & Albertson; Finnegan, Henderson, Farabow, Garrett & Dunner; Patton Boggs; Steptoe & Johnson; and Wiley Rein & Fielding.

In 1998, four firms allied in Chicago. Three members remain: Mayer, Brown, Rowe & Maw; Neal, Gerber & Eisenberg; and Ungaretti & Harris.

A third health-care consortium was formed in Atlanta in 2002. Its members are Arnall Golden Gregory, McKenna Long & Aldridge, and Smith Gambrell & Russell.

In San Francisco, five firms have been studying the feasibility of creating a consortium. In Boston and Richmond, VA, firms have met with consultants to consider alliances. However, an attempt 2 years ago in New York to put a group together failed to jell.

A leading exponent of such consortia is William Stanton, managing director of Palmer & Cay, a Savannah, GA-based insurance brokerage and benefits consulting firm. “The consortium is a way in which you allow a law firm with 700 to 2000 employees to join with other firms and therefore replicate the market position of a larger organization,” Stanton says.

The leverage they obtain helps the firms obtain lower costs ' not just for insurance premiums, but also for pooling charges, stop-loss coverage, network access and administration, he said. The larger group also results in elimination of the margin insurers charge to cover claims volatility, which can be as high as 11% of insurance cost, Stanton says.

The proof of pooling concept is in the numbers, Stanton continues. The DC group has seen an average cost increase of 9% since its inception; the market average for the same period was 13%. Chicago has seen a 9.7% average increase, compared to 15.2% for the market. In just a year, Atlanta has seen 13% compared to 16% for the market.

Fork in the Road

Not everyone believes there is a magic bullet. Bernard Schaeffer, benefits director at New York's Shearman & Sterling, sees rising health-care costs as an unsolvable issue for law firms. “I don't see a solution to escalating health-care costs,” he says. “An employer's options are limited.” The only real answer is to pass the costs on to employees, but employers run a risk in doing that, he says. “To adopt a defined contribution approach would be a dramatic change, and would not be well received.”

It was this very issue that led 1600-employee Heller Ehrman White & McAuliffe to consider joining a health care consortium with four other firms, says David Sanders, Heller's chief human resources officer.

“The first thing we did was to make a decision that we would assume more of the cost increase than our employees,” Sanders says. “That is a fork in the road for all companies – to decide whether you'll pass along the costs to employees or bear them.”

Having taken that route, Heller Ehrman opted not to increase deductibles and co-payments. “We decided last year that it wasn't worth it. Our deductibles and co-payments were high enough. People were going to have large enough increases in their premiums.”

Instead, the firm started looking at different plan designs, and, in particular, at the consortium. This was not the first time. Four years earlier, the firm took steps to form a consortium, but found insufficient interest among northern California neighbors. Health care was not the burning issue that it is today, he said. “We've found a much keener interest now.”

[Ed. Note: Consortia can, and may need to, develop incrementally. As of December 2003, the above-described discussions by five Northern CA firms have not generated a full consortium. But HR chief David Sanders reports that Heller Ehrman and another firm have started a two-member consortium with the cooperation of the health insurer both of them use. By pooling their insureds, they've eliminated the carrier's claims-volatility margin (about 5% in their case) and somewhat reduced administrative costs as well. Both firms have even been able to keep their existing plan structures; though it's understood that if more firms join the group ' as is hoped ' then compromising on minor differences between plans will be needed to avoid wasteful administrative duplication.]