Health Benefit Increases Spare No One

After years of foot-dragging, large U.S. law firms have embraced the mainstream business practice of countering rising health care costs by steering employees and partners into managed care plans. A recent comprehensive survey of large law firms' employee benefit practices conducted by The Segal Company shows, among other findings, that less than one in five firms offers a traditional indemnity health plan today. The survey also found that health plans at law firms continue to reflect the special needs of these professional service organizations as a whole ' as well as those of the individual firms that participated.

The survey universe comprised the 200 largest U.S. law firms. Of these, 56 (28%) responded ' all in all a strong result. Survey data shows that most large law firms:

• Finance a significantly higher proportion of the cost of employee health coverage for paralegals and administrative staffers than for senior attorneys and associates; and
• Provide health coverage to employees' domestic partners (generally including both same-sex and opposite-sex couples).

Besides health plan information, the Segal survey gathered data from law firms about their life and disability insurance benefits, as well as their policies on maternity, paternity and adoption leave, employee assistance plans, transportation benefits and a variety of other benefits.

The fact that law firms have been pummeled by the same relentless assault of double-digit health cost inflation (14.5% on average in 2003 with similar rates anticipated for 2004) as other employers appears to explain the current prevalence of PPOs (82%), HMOs (58%) and point-of-service (POS) plans (46%), offered by the firms surveyed. Only 17% of the surveyed firms offered a traditional indemnity plan.

Law firms' (and, for that matter, most other employers') shunning of such plans is primarily attributable to the fact that indemnity plans have, on average, been the least effective in retarding the pace of health services price inflation. Related Segal Company research – our annual Segal Health Plan Cost Trend Survey ' shows HMOs with the lowest combined medical/prescription inflation rate last year (at 14.4%), a virtual tie with PPOs (14.5%), followed by POS plans (14.9%) and non-network fee-for-service (ie, indemnity) plans, at 16.2%.

Projections for 2004 also show HMOs with the lowest cost trends (13.7% when prescription benefits are built in) and indemnity plans with the highest (15.6%). See Table 1.

[IMGCAP(1)]

Those law firms that continue to offer indemnity plans appear to be using plans designed aggressively to discourage employees from choosing such plans. For example, the average deductible for a single coverage plan among surveyed law firms was about $600 ' more than 50% higher than the national all-employer average. Similarly, the average deductible for family coverage in a law firm's indemnity plan, nearly $1500, was almost double the national all-employer average.

A detailed breakdown of deductible and co-payment schedules for different plan types of surveyed firms is presented in Table 2, below. Table 3, also below, illustrates the different coinsurance schedules by plan type.

[IMGCAP(3)]

[IMGCAP(4)]

Cost-Management Strategies

Besides discouraging participation in traditional indemnity plans, law firms reported employing the following cost-management strategies:

• Increased employee contributions (64% of surveyed firms);
• Negotiated with a current carrier (50%); and
• Increased network copayments (25%)

(See Graph 1)

[IMGCAP(2)]

Despite much general discussion in employee benefit circles in recent years about so-called “defined contribution (DC) medical plans” (in which employers set a fixed limit on their contribution to employees' health costs), only 2% of the laws firms surveyed have introduced such plans to try and manage costs. And, while overall statistics on such plans are sketchy, law firms appear to be in step with employers in other sectors with regard to DC health plans.

Raising employee contributions to health plans is also the preferred health plan cost-management strategy among all employers. But, how law firm employees and partners have fared through this process, on average, varies according to their function and seniority within their firms. Specifically, senior attorneys pay a much higher proportion of the cost of their health benefits than do paralegal and other non-attorney staffers.

For example, for family coverage, senior attorneys contribute 45% of the cost of such coverage, compared to 33% for paralegals. Associates fare somewhat better than senior attorneys, contributing on average 41% for family coverage.

Yet even paralegals pay a higher proportion of the cost of family coverage than the national average rate for all employees (27%). For employee-only coverage, paralegals fare slightly better than the national average (contributing 14% vs. 16%). Senior attorneys contribute, on average, 28% of the cost of single coverage, and associates contribute 23%.

The Segal survey reveals a general pattern in which the employee contribution to the health plan does not vary significantly from one plan type (ie, HMO, PPO, etc.) to the next (see Table 3). For example, the average contribution level for employee-only coverage for paralegal and administrative employees ranges in a narrow band between 13% and 15%.

The only notable exception was what paralegals and other non-attorneys paid for family plans. These employees pay, on average, 30% when purchasing family coverage from an HMO, versus 37% for a PPO.

Following are some additional survey highlights:

• Short-Term Disability: Twenty-six weeks was the most common average duration of STD leave offered. This finding applies to all employment categories.
• Long-Term Disability: At two-thirds of surveyed firms, LTD insurance replaced about two-thirds of pay. This replacement rate applied to all employment categories.
• Life Insurance: Basic life insurance coverage varied by employment category. Most surveyed firms provided a fixed amount of coverage for senior attorneys and partners, but a multiple of salary for non-legal and paralegal staff and associates. Nearly all (80%) of the surveyed firms allow employees to buy supplemental life insurance. Group variable universal life insurance was the most prevalent supplemental life insurance offered to partners. Term and portable term insurance were more prevalent offerings to individuals in the other three employment categories.
• Parental Leave: The duration of paid maternity leave is shorter for non-legal and paralegal staff (typically seven weeks or less) than for the other three employment categories (generally 12 to 15 weeks). Only 48% of the law firms participating in the survey offer paid paternity leave.
• Dental Plans: Dental plans are more widespread than vision plans. However, fewer firms may offer vision benefits than dental benefits because many medical plans, especially those for partners, include vision coverage.

Conclusion

While double-digit average increases in trend are expected to continue in 2004, it is worth noting that cost trend rates are still three to five times the rate of general CPI. Consequently, all plan sponsors are facing serious challenges in balancing the needs of their employees against fiscal pressures, even though for law firms, benefits are a smaller percentage of pay than they may represent for other employers. Sponsors of health plans for law firms will need to adopt a new round of strategies and tactics to meet their employees' needs in a way that balances cost with the desire to provide a meaningful benefit for both partners and employees.

There will be no single solution. Successful management of health care costs depends on a combination of customized strategies, including vendor management, plan management and individual health management.

Vendor Management

Law firms can reduce costs by managing arrangements with insurers, MCOs, PBMs and other vendors that administer their health benefits program. These steps can include the following:

• Establish optimal vendor contract terms and create accountability for vendors to reduce health care cost and improve quality;
• Measure contract terms to actual performance (such as guarantees on discounts) to ensure service agreement levels are achieved;
• Review vendor contracts closely and compare them to competitive terms in the industry. This could lead to more aggressive negotiation of vendor terms, such as trend, administrative fees, margin and risk charges;
• Audit claims processing results;
• Require vendors to agree to performance guarantees for financial management, satisfactory claims and customer services;
• Partner with vendors to customize hospital networks to negotiate optimal pricing; and
• Reduce the level of hospital outlier payments.

Plan Management

Plan design is one of the most controllable factors that influences health plan costs. Law firms that want to preserve cost-effective and competitive benefit levels could:

• Establish cost-sharing provisions (ie, deductibles, copayments, coinsurance and monthly contributions) that moderate overuse of discretionary health services;
• Establish appropriate cost-sharing differentials among treatment options and settings so participants are encouraged to seek the most cost-effective courses of treatment with certain providers;
• Provide coverage incentives for support services and complementary care to motivate participants to improve their health;
• Create plan features that manage the care and mitigate the cost of catastrophic claims;
• Consider introducing designs that offer first-dollar health reimbursement arrangements attached to high-deductible coverage options; and
• Enforce pre-certification and utilization review rules.

Individual Health Management

There is growing evidence to support that some health care services are overused, ineffective and not being properly adhered to by patients. These types of services could be avoided through prevention and health promotion. Law firms should:

• Introduce disease management programs for chronic conditions such as diabetes, hypertension and depression;
• Give participants user-friendly health care information about treatment options and associated costs;
• Profile provider results on outcome and cost and channel patients to best performing providers;
• Promote compliance with prescribed treatments; and
• Provide wellness and preventive plan incentives (eg, education and financial incentives to encourage participants with weight problems and poor eating habits to change their diets and exercise regularly).

Law firms will need to take action each of these fronts ' providers, suppliers, patients and intermediaries ' to increase the efficiency of the health care delivery system, create greater medical supplier/provider price competition and reduce over-utilization and waste.

After years of foot-dragging, large U.S. law firms have embraced the mainstream business practice of countering rising health care costs by steering employees and partners into managed care plans. A recent comprehensive survey of large law firms' employee benefit practices conducted by The Segal Company shows, among other findings, that less than one in five firms offers a traditional indemnity health plan today. The survey also found that health plans at law firms continue to reflect the special needs of these professional service organizations as a whole ' as well as those of the individual firms that participated.

The survey universe comprised the 200 largest U.S. law firms. Of these, 56 (28%) responded ' all in all a strong result. Survey data shows that most large law firms:

• Finance a significantly higher proportion of the cost of employee health coverage for paralegals and administrative staffers than for senior attorneys and associates; and
• Provide health coverage to employees' domestic partners (generally including both same-sex and opposite-sex couples).

Besides health plan information, the Segal survey gathered data from law firms about their life and disability insurance benefits, as well as their policies on maternity, paternity and adoption leave, employee assistance plans, transportation benefits and a variety of other benefits.

The fact that law firms have been pummeled by the same relentless assault of double-digit health cost inflation (14.5% on average in 2003 with similar rates anticipated for 2004) as other employers appears to explain the current prevalence of PPOs (82%), HMOs (58%) and point-of-service (POS) plans (46%), offered by the firms surveyed. Only 17% of the surveyed firms offered a traditional indemnity plan.

Law firms' (and, for that matter, most other employers') shunning of such plans is primarily attributable to the fact that indemnity plans have, on average, been the least effective in retarding the pace of health services price inflation. Related Segal Company research – our annual Segal Health Plan Cost Trend Survey ' shows HMOs with the lowest combined medical/prescription inflation rate last year (at 14.4%), a virtual tie with PPOs (14.5%), followed by POS plans (14.9%) and non-network fee-for-service (ie, indemnity) plans, at 16.2%.

Projections for 2004 also show HMOs with the lowest cost trends (13.7% when prescription benefits are built in) and indemnity plans with the highest (15.6%). See Table 1.

[IMGCAP(1)]

Those law firms that continue to offer indemnity plans appear to be using plans designed aggressively to discourage employees from choosing such plans. For example, the average deductible for a single coverage plan among surveyed law firms was about $600 ' more than 50% higher than the national all-employer average. Similarly, the average deductible for family coverage in a law firm's indemnity plan, nearly $1500, was almost double the national all-employer average.

A detailed breakdown of deductible and co-payment schedules for different plan types of surveyed firms is presented in Table 2, below. Table 3, also below, illustrates the different coinsurance schedules by plan type.

[IMGCAP(3)]

[IMGCAP(4)]

Cost-Management Strategies

Besides discouraging participation in traditional indemnity plans, law firms reported employing the following cost-management strategies:

• Increased employee contributions (64% of surveyed firms);
• Negotiated with a current carrier (50%); and
• Increased network copayments (25%)

(See Graph 1)

[IMGCAP(2)]

Despite much general discussion in employee benefit circles in recent years about so-called “defined contribution (DC) medical plans” (in which employers set a fixed limit on their contribution to employees' health costs), only 2% of the laws firms surveyed have introduced such plans to try and manage costs. And, while overall statistics on such plans are sketchy, law firms appear to be in step with employers in other sectors with regard to DC health plans.

Raising employee contributions to health plans is also the preferred health plan cost-management strategy among all employers. But, how law firm employees and partners have fared through this process, on average, varies according to their function and seniority within their firms. Specifically, senior attorneys pay a much higher proportion of the cost of their health benefits than do paralegal and other non-attorney staffers.

For example, for family coverage, senior attorneys contribute 45% of the cost of such coverage, compared to 33% for paralegals. Associates fare somewhat better than senior attorneys, contributing on average 41% for family coverage.

Yet even paralegals pay a higher proportion of the cost of family coverage than the national average rate for all employees (27%). For employee-only coverage, paralegals fare slightly better than the national average (contributing 14% vs. 16%). Senior attorneys contribute, on average, 28% of the cost of single coverage, and associates contribute 23%.

The Segal survey reveals a general pattern in which the employee contribution to the health plan does not vary significantly from one plan type (ie, HMO, PPO, etc.) to the next (see Table 3). For example, the average contribution level for employee-only coverage for paralegal and administrative employees ranges in a narrow band between 13% and 15%.

The only notable exception was what paralegals and other non-attorneys paid for family plans. These employees pay, on average, 30% when purchasing family coverage from an HMO, versus 37% for a PPO.

Following are some additional survey highlights:

• Short-Term Disability: Twenty-six weeks was the most common average duration of STD leave offered. This finding applies to all employment categories.
• Long-Term Disability: At two-thirds of surveyed firms, LTD insurance replaced about two-thirds of pay. This replacement rate applied to all employment categories.
• Life Insurance: Basic life insurance coverage varied by employment category. Most surveyed firms provided a fixed amount of coverage for senior attorneys and partners, but a multiple of salary for non-legal and paralegal staff and associates. Nearly all (80%) of the surveyed firms allow employees to buy supplemental life insurance. Group variable universal life insurance was the most prevalent supplemental life insurance offered to partners. Term and portable term insurance were more prevalent offerings to individuals in the other three employment categories.
• Parental Leave: The duration of paid maternity leave is shorter for non-legal and paralegal staff (typically seven weeks or less) than for the other three employment categories (generally 12 to 15 weeks). Only 48% of the law firms participating in the survey offer paid paternity leave.
• Dental Plans: Dental plans are more widespread than vision plans. However, fewer firms may offer vision benefits than dental benefits because many medical plans, especially those for partners, include vision coverage.

Conclusion

While double-digit average increases in trend are expected to continue in 2004, it is worth noting that cost trend rates are still three to five times the rate of general CPI. Consequently, all plan sponsors are facing serious challenges in balancing the needs of their employees against fiscal pressures, even though for law firms, benefits are a smaller percentage of pay than they may represent for other employers. Sponsors of health plans for law firms will need to adopt a new round of strategies and tactics to meet their employees' needs in a way that balances cost with the desire to provide a meaningful benefit for both partners and employees.

There will be no single solution. Successful management of health care costs depends on a combination of customized strategies, including vendor management, plan management and individual health management.

Vendor Management

Law firms can reduce costs by managing arrangements with insurers, MCOs, PBMs and other vendors that administer their health benefits program. These steps can include the following:

• Establish optimal vendor contract terms and create accountability for vendors to reduce health care cost and improve quality;
• Measure contract terms to actual performance (such as guarantees on discounts) to ensure service agreement levels are achieved;
• Review vendor contracts closely and compare them to competitive terms in the industry. This could lead to more aggressive negotiation of vendor terms, such as trend, administrative fees, margin and risk charges;
• Audit claims processing results;
• Require vendors to agree to performance guarantees for financial management, satisfactory claims and customer services;
• Partner with vendors to customize hospital networks to negotiate optimal pricing; and
• Reduce the level of hospital outlier payments.

Plan Management

Plan design is one of the most controllable factors that influences health plan costs. Law firms that want to preserve cost-effective and competitive benefit levels could:

• Establish cost-sharing provisions (ie, deductibles, copayments, coinsurance and monthly contributions) that moderate overuse of discretionary health services;
• Establish appropriate cost-sharing differentials among treatment options and settings so participants are encouraged to seek the most cost-effective courses of treatment with certain providers;
• Provide coverage incentives for support services and complementary care to motivate participants to improve their health;
• Create plan features that manage the care and mitigate the cost of catastrophic claims;
• Consider introducing designs that offer first-dollar health reimbursement arrangements attached to high-deductible coverage options; and
• Enforce pre-certification and utilization review rules.

Individual Health Management

There is growing evidence to support that some health care services are overused, ineffective and not being properly adhered to by patients. These types of services could be avoided through prevention and health promotion. Law firms should:

• Introduce disease management programs for chronic conditions such as diabetes, hypertension and depression;
• Give participants user-friendly health care information about treatment options and associated costs;
• Profile provider results on outcome and cost and channel patients to best performing providers;
• Promote compliance with prescribed treatments; and
• Provide wellness and preventive plan incentives (eg, education and financial incentives to encourage participants with weight problems and poor eating habits to change their diets and exercise regularly).

Law firms will need to take action each of these fronts ' providers, suppliers, patients and intermediaries ' to increase the efficiency of the health care delivery system, create greater medical supplier/provider price competition and reduce over-utilization and waste.