Edited by Thorpe Benefits from original article in Canadian HR Reporter, September 2001

It may be a bit controversial, but companies should consider coinsurance as a possible remedy for the ever-increasing costs of benefit plans.

Striking a balance between attracting the best people and controlling the costs of compensation remains a huge challenge. After all, payroll and benefits are one of the biggest costs for an organization. It's a pressure-cooker environment that HR professionals live with daily and any strategy to help manage these escalating costs without harming recruiting capabilities is invaluable. One such technique is coinsurance.

According to the Canadian Institute of Health Information, drugs represented only 8.8 percent of overall healthcare costs in 1975. By 1985, this had increased to 9.5 percent; in 1995, it was up to 13.4 percent; and by 2000, it had climbed still higher to 15.5 percent of overall costs.

Employers need to instill an understanding of the dollar value of these benefits among employees. They need to encourage employees to become informed users or "shoppers" in the healthcare system. Too many Canadians see the headlines about healthcare costs in the U.S. and complacently think, "That could never happen here." Employees don't realize that similar costs are being absorbed today by their employer's plan. Unfortunately, employers helped create this situation.

In the beginning, many healthcare plans covered all prescription drugs at 100 percent, no questions asked. Employees didn't have to think about their so-called "drug plans." They just had to fill out a claim form, attach a receipt and they would have their out-of- pocket expenses reimbursed.

Unfortunately, employees' awareness hasn't increased along with their drug costs. Worse, a sense of entitlement has emerged, fostering an attitude of "Why should I work for you if your benefit plan isn't as comprehensive as your competitor's?"

Education is the key

The only effective way to combat this phenomenon is to educate your employees/ consumers. How can they be expected to appreciate what is being invested in their benefits if they do not see any of the costs?

Initially, many organizations used deductibles and co-payments to encourage employees to develop a "shared stake" in their benefits costs.

But the problem with these approaches is that the flat dollar amount, such as a $25 deductible per year, or a $2 co-payment per prescription, quickly becomes meaningless when a single prescription may have increased from $12 to $75 as a result of new drug therapies.

Sharing the cost – an effective approach

A better (if somewhat controversial) approach is coinsurance. What coinsurance means is that for every prescription your employees fill, they pay a specific percentage of the total cost. So, if your coinsurance is 20 percent and the prescription costs $10, the benefit plan will cover $8 and the employee will pay $2. "So what," you say, "this is the same amount as your basic co-payment." However, when the prescription costs $100, the benefit plan will pay $80 and the employee will pay $20.

The advantage of coinsurance is that your employees' participation in the cost of their benefits increases with their usage and the total dollar value of their expenses.

When you learn that the total retail spending on prescription and over-the-counter drugs in Canada in 1998 was $12.4 billion, you recognize that there is a significant amount of money at stake.

Of course, this is where the controversy emerges. What about those employees who may choose not to fill a prescription because the dollar value of their coinsurance on a particular drug is too much for their personal financial situation? There are a small but growing number of advocates for the position that cost containment measures, such as coinsurance, create a risk that some employees may not obtain appropriate care when they need it.

A response to the "financial hardship" argument is for HR to put policies in place to provide a benchmark for management and employees. If employers are concerned about employees being unable to cover the costs associated with a serious accident or illness, such as multiple sclerosis or cancer, where they may be faced with extensive medical bills, employers can establish an out-of-pocket maximum.

What this does is limit the total amount that employees would ever have to pay in a single year. For example, with a coinsurance amount of 20 percent, employees would pay 20 percent of any covered medical expenses, such as prescription drugs. In a situation where the employee might have drug expenses of $l0,000 the employee would have to pay $2,000 of those expenses. However, with an out-of pocket maximum set at $500 or $750, after the employee has reached that "out-of-pocket" threshold, any further expenses would be covered by the plan at 100 percent.

Cost containment measures are not intended to create hardship for plan members. Instead, they are initiated to help plan sponsors ensure that plans are financially viable. The best employers will use discretion to implement those measures which best reflect corporate objectives and culture.

While employees may balk at the idea of paying a higher percentage of their prescriptions or other medical expenses, HR professionals should remind employees that they will benefit in other ways.

A major benefit of using coinsurance in the extended health benefits plan is that it fosters healthcare education among employees. When employees are paying a greater portion of the cost, they are motivated to ask about alternative treatments, to learn about generic drugs versus name brands, to look for less expensive dispensing options, and to co-ordinate their benefits coverage through other plans, such as a spousal plan.

Another benefit is that the money employers save through coinsurance can be invested in other compensation programs that are more "high profile" to current employees and may help when recruiting new ones.

The bottom line is that employers need to move from simply paying for employees' drugs to making employees partners in managing their health and health-care costs. A more informed employee group will be a more satisfied employee group –  a group that respects the benefits programs employers make available to them and uses those programs effectively.

Definitions

Co-payment: Similar to coinsurance in that the policyholder must pay a portion of the expenses in the form of a flat fee, such as a set co-payment for each prescription filled.

Coinsurance: The percentage of drug or other health care expenses that the policy holder must pay for each occurrence.