Firms cut back medical coverage

Employees with families may be in for an unpleasant surprise this fall as they look over their annual health-insurance enrollment packages. Many companies -- concerned about rising costs -- are dramatically cutting benefits for spouses and children, or are trying to get families off their plans altogether.

Some companies are charging premiums that rise for each additional child, while others are making employees choose: Cover your spouse or your children, but not both. In some cases, employees who cover their working spouse are being required to pay more than $1,000 a year in extra charges.

The Boeing Co. is charging $100 a month extra to cover employees’ working spouses who have turned down comparable coverage from their own companies, while Verizon Communications’ recent contracts with its unions include a similar $40 monthly fee. In January, the University of California system will begin charging employees sharply higher premiums if they want coverage for a spouse than employees who choose not to cover a spouse.

“What we’re seeing is a dramatic evolution in the definition of what companies believe they must pay for employees’ health care, especially as it has to do with families,� says Mark Mathias, a senior vice president at Marsh Inc., a division of the Marsh & McLennan Co.

In May, Kassy Perry, president of a small public-relations company in Sacramento, halved the firm’s contribution to coverage for spouses and children, although she has continued to pay 100% of employee premiums. The move forced several employees to switch themselves and their children to other plans.

Perry said she first began talking about reducing family benefits three years ago, but she couldn’t hold off any longer after insurance premiums jumped an additional 14% this year. “I couldn’t do it anymore,� she said. “This was the best available option.�

In today’s economy, a reduction in employee benefits may seem relatively common. But benefits experts say the fact that employers are retreating from family coverage -- especially as overtly as some are now -- is a significant departure from a health-care model that has been around since World War II. After the federal government froze wages during the war, companies began offering health insurance as an incentive to woo workers. Most covered the employee and his or her family, no matter the size.

Although providing family health insurance may generate good will and an overall social benefit, economist say there is little evidence that offering coverage to workers actually adds significantly to the corporate bottom line -- a corollary that grows even less certain when spouses and children are considered.

While companies have long offered employees cash incentives to opt out of their health coverage, a small number of companies are taking a new twist on the cash-saving tactic. They are offering different levels of incentives depending on just who drops out. In other words, an employee gets a certain level if he or she chooses not to cover children; even more if he or she doesn’t cover a spouse; and the most if the whole family turns down coverage.

“Many companies are loath to slash benefits or to get rid of coverage altogether,� says Kirby Bosley, who heads the health-care practice in Los Angeles for William M. Mercer Inc., a human-resources management consulting firm. But reducing family coverage “is something employers are increasingly comfortable about doing.�

By some estimates, employees’ families can account for up to three-quarters of a company’s health-care costs.

Employers insist that they are buckling under rapidly rising health benefit costs and that they have little choice but to pass on costs to workers. According to a survey by Towers Perrin, a human-resources consultant firm, health care costs nationally have risen more than 16% this year.

Next year, employers’ health-benefit costs are expected to rise an additional 12%, constituting a doubling in costs since 1999, according to the survey.

Unlike the last bout of health-care inflation nearly a decade ago, employers can’t expect to wring significant savings out of doctors, hospitals and HMOs, which have already accepted years of deep cuts.

Recent highly touted cost-savings efforts, such as high-deductible health plans and tiered hospital pricing (paying more to go to hospitals outside a plan’s approved network), have been slow to catch on, benefits experts say.

A recent study by the Kaiser Family Foundation, a health policy group based in Menlo Park, Calif., found that families were increasingly feeling the burden of health costs, mostly by way of sharp increases in health premiums and out-of-pocket charges such as co-payments.

In the last two years, family premiums have risen 50%, to an annual average of $2,412, while single employee premiums have jumped to $508 annually. The percentage of companies that fully subsidize family health insurance has fallen from 27% two years ago to 15% today.

People like Elaine Linn of Folsom, Calif., say they’re nearing the breaking point. Linn, a 32-year-old employee with Perry’s public relations firm, decided to move her two children to her husband’s school district plan after she realized that she would have to pay nearly $250 a month in additional costs under her company’s new policy. She pays $70 a month for their coverage under the new arrangement.

However, Linn says the switch has been complicated by that fact that her husband’s plan is more restrictive than her own. This summer, when she tried to refill a prescription for her year-old son, who has Down syndrome, she was told the medication wasn’t on an approved list.

Although she finally got the prescription filled, it took five weeks to resolve the issue. “It was a nightmare,� she says.

Some consumer advocates fear what will happen to those who can’t simply switch coverage to a spouse’s plan.

So far, the cutbacks in family benefits appear to be taking hold the most in industries with relatively low unemployment rates, such as engineering, and in smaller companies that have been absorbing the biggest health-premium increases -- as much as 40% a year -- because their smaller size means they lack the clout to negotiate lower rates.

Some larger companies have begun to scale back employee benefits, but experts say most big employers are moving toward the trend more slowly.

Larger unions are also likely to be spared, at least for the time being. In fact, in recent contract negotiations, the United Auto Workers forfeited wage increases to maintain nearly cost-free health care.

Under a landmark health bill passed by the Legislature last month -- and awaiting Gov. Gray Davis’ signature -- businesses with 200 or more workers in California would have to provide medical insurance to their employees’ dependents, starting in 2006.

There is at least some good news for employees: Many companies are increasing the amount of money allowed in flex-spending accounts, which let employees set aside part of their income tax-free for health costs. And not all spouses are paying extra cash if they skip their own health plans. Most aren’t penalized if their company’s plan doesn’t offer equal or better benefits.