Time for employers to consider health insurance alternatives?

Healthcare costs just keep rising for US companies and their employees. Annual premiums for employee-sponsored health insurance grew 4% to $16,351 per family this year, according to the Kaiser Family Foundation's "2013 Employer Health Benefits Survey" released last week, with workers paying an average of $4,565.

While 4% may not seem insurmountable, especially when compared with the nearly 10% rise a decade ago, it's still steeper than average 2013 salary increments that hover around the 2. 8% mark. It's no wonder that more than 55% of the firms reviewed in the Kaiser report were shopping around for a new health plan or insurance carrier.

"Pretty much universally, employers are frustrated by trying to manage healthcare costs through traditional means," said Jim Winkler, chief innovation officer for health and benefits at Aon Hewitt, a human resources and risk management consulting firm and insurance broker.

But for employers fed up with the rising costs, what are the alternatives?

Alternative healthcare strategies

Increasingly, employers are turning to payment and reward strategies to improve health among their employees, according to a recent Aon Hewitt report.

"Companies, more than ever, are invested in preventative care," Winkler said. "Most employers believe they aren't getting the expected results in spite of their spending, so now they are aiming at giving employees financial incentives to encourage them to adopt healthy behaviors. So, for example, they believe that the $100 they give an employee for participating in an exercise program may save them $10,000 worth of hospital bills later."

Other options include cooperatives, such as the Houston-based Patient/Physician Cooperatives (PPC), which Don McCormick founded in 2005.

McCormick had been operating a free, charity clinic when he stumbled onto something that surprised him: Uninsured people were willing to pay a small monthly fee – say, $18 – for access to medical care. Then McCormick learned that doctors would actually earn more by billing patients directly – even at those nominal fees – than they would by billing through Medicare, Medicaid or HMOs.

In Houston, PPC offers primary or basic healthcare services, with no co-payments, at monthly fees of $10 for children, $25 for adults and $35 for seniors – with an extra $5 per household for vision and dental services. Pre-existing conditions are covered, and members get prescription drugs at 15% to 50% below the wholesale price. To be clear, this is not health insurance; instead, it's a a cooperative that gains significant savings by collective buying and by cutting administrative costs.

America has a rich history of medical cooperatives. In the early 1930s, the Farm Security Administration ran them long before the concept of health insurance as we know now was developed. Today, aside from the PPC – which has spread to North Carolina and Portland, Oregon – consumers can pick from options such as the Direct Primary Care, Christian Care Ministry's Medi-Share, the Cooperative Network's Co-op Care and Group Health Cooperative, among many others.

The Affordable Care Act also included $2bn in loans for nonprofit co-ops, intended to foster competition to existing private health insurance. But the program faces some financial snags.

Health co-op challenges

Few employers have chosen to partner with cooperatives or use health insurance alternatives so far. One challenge is that most co-ops offer only primary services. This "limited applicability", Winkler said, prevents them from replacing traditional insurance.

"Unless these models evolve to become more full service, they won't meet the mandatory conditions under the Affordable Care Act to ensure adequate employer coverage," Winkler said. "The ACA is pretty prescriptive in requiring employers to provide full, preventative and catastrophic care and co-ops haven't scaled to offer such comprehensive services yet."

Another obstacle is that most doctors and hospitals are already locked into contracts with the dominant insurance providers, so negotiating a better deal can be tough.

Finally, most of these co-ops are small and don't provide national coverage, which is an issue given that large companies are far more likely to offer health benefits than small ones: 99% of companies with 200 employees or more offer them, compared with only 57% of firms with 199 employees or less.

"These alternatives are usually very specific to location," Winkler said. "So while consumers may elect to participate in such programs, employers, especially large corporations, may not necessarily offer them."

None of Aon Hewitt's clients are currently considering such alternatives. Winkler says he wouldn't advise any of his clients to adopt them just yet as there is little research to show how cost effective they really are, especially in the long term.

Cherry picking the healthy

That's partly because their clientele is mostly made up of healthier people, said Dr Geoffrey Joyce, an associate professor of pharmaceutical economics at the University of Southern California. "Co-ops don't really deal with the seriously sick or high-risk people," he said. "Would they be able as successful if they had to take on the 20% of the population who are chronically ill and need hospitalization on a regular basis?"

Any program that really wants to capture significant market share in the present economy has to show real cost benefit. After all, healthcare spending has exceeded the rate of economic growth almost consistently for the last 50 years, Joyce said, now making up almost 18% of the economy.

So cooperatives aren't ready to break private insurance companies' monopoly on employer-sponsored healthcare yet. But, as Joyce said: "If the ACA doesn't perform as expected, then I think we are open to all sorts of alternatives, including co-ops. For now, they will remain a niche market appealing only to a certain segment of the population."

Such as, perhaps, some of the estimated 48.6 million of uninsured people in the US.

Paromita Pain, a former senior reporter with The Hindu in India, is a PhD student at the University of Texas at Austin