University of Minnesota Health Plan Task Force January 14, 1998
Comparison of Health Insurance Purchasing Alternatives
Executive Summary Introduction Current Shortcomings Trends Alternative Models Profiles Retirees Further Analysis Summary
Appendices: 1, 2, 3, 4, 5, 6, 7, 8 Glossary

Trends in the Health Care Market

With the consolidation of the health care market in recent years, the range of health plan choices open to University faculty and staff is expected to remain fairly limited. Three carriers currently have 85% of the Twin Cities’ health plan market share. Blue Cross, Allina, and HealthPartners are the only major health plans in the Twin Cities, and Blue Cross is the only carrier that provides insurance products in every county of the state. This consolidation motivated employers to take a more proactive role in purchasing health insurance.

In the first half of this decade, health insurance premiums per month were increasing by at least 10% per year. Between 1994 and 1995, total premiums increased less than 2% for the state’s largest HMOs, and by less than 1% between 1995 and 1996. In 1997, total premium increases for Blue Plus, HealthPartners, and Medica averaged between 9.0 and 9.5% (MDH, October 1997). Total premiums for the SEGIP health plans will rise by 9.7%, on average, in 1998.

The primary reason that total premiums are increasing so dramatically after several years of moderate growth is that revenues have not kept pace with expenditures for the major carriers. The previous two years of relatively flat premium growth were driven by employer purchasing strategies and competitive pricing by health plans to gain market share. These pricing policies are not sustainable, as carriers seek to raise premium revenue to match rising medical expenditures (MDH, October 1997). Medical expenditures increased in recent years due to employee utilization of physician and outpatient services that was greater than the expected utilization.

Employers can try to restore more moderate premium increases by aggressively managing their health benefits and adopting different purchasing strategies. The two most widely used purchasing strategies (that will be discussed in detail below) are total replacement and self- insurance. In 1993, most Minnesota employers with 100 or more employees offered only one health plan (MDH, 1995). Much has changed since that time, but total replacement remains a popular purchasing approach that limits premium cost increases. The City of St. Paul is replacing a Medica health plan with a HealthPartners plan for 1998 and will see total premiums actually decline by 6.5%.

BHCAG has introduced a new organizational approach to Twin Cities and Duluth markets by contracting for services directly with providers and hospitals. They have also been successful at keeping premium increases below the market average for the past several years with this combination of “direct contracting” and self-insurance. However, premiums for the 1998 contract year have increased significantly and will likely increase further in coming years.

Self-insurance is the other popular purchasing strategy, particularly among private sector and large employers. In 1995, forty- six percent of all private sector employees were enrolled in self- insured plans, and 62% of enrollees in firms with 100 or more employees were in self-insured health plans. The total number of people enrolled in self-insured plans in Minnesota roughly doubled from 700,000 in 1991 to 1,500,000 in 1995. In 1996, 1,600,000 people were enrolled in self- insured health plans in Minnesota (Baumgarten, 1997). The number of private sector employees enrolled in self-insured plans is heavily influenced by the self-insured BHCAG member companies. Even public sector firms have used self-insurance as a means to contain health care costs. SEGIP self-insures its State Health Plan and State Health Plan Select products, which enroll 30% of University faculty and staff.

The success of these various purchasers can be seen in Table 1 below that compares the two major purchasing pools in the state - SEGIP and BHCAG - with the rate of growth in premiums of HMO commercial products.

Table 1. Percentage Premium Changes by Group, 1990-1997

Year State Employee Group Insurance Program Buyers Health Care Action Group HMO Commercial Products
1990 13.7% n/a 16.9%
1991 9.6% n/a 14.5%
1992 6.3% n/a 7.5%
1993 5.9% -11.0% 5.8%
1994 3.0% 4.2% 4.2%
1995 -1.7% 3.8% -0.6%
1996 -2.5% 4.0% n/a
1997 7.0% 4.0% n/a

As Table 1 illustrates, both major purchasers have been fairly effective at containing premium increases. Total premiums will, however, continue to increase as long as premium revenue is below incurred claims, which has been the case for the past two years. A more detailed discussion of other purchasing strategies and premium costs for 1998 are addressed in the next section.

Next Section: Alternative Models