Good things come in small packages. That's the mantra now being chanted by a cadre of benefits consultants and brokers looking to add value in the employer health care arena as rising premiums and increasingly complex administrative requirements cause many businesses to shy away from offering health care benefits.

Rather than counsel employers to control costs by tweaking an existing group health care benefits package, some brokers are advocating changing the health benefit delivery model. The emphasis is moving from group to employer-engineered individual policies.

There are three models taking shape. One involves offering individual insurance policies through affinity groups and compensating employees for the premiums by paying a higher salary. Another involves using Health Reimbursement Accounts to fund premiums for individual insurance policies. And the third involves providing access to either individual or limited benefit plans on a national basis. All three models are particularly germane to small-business owners and employers with part-time workers, contractors or consultants.

"We are doing a significant amount of business in employer individual policies, especially in the small employer market," says Michael Paschke, executive vice president of Brown & Brown. "In a group plan, 10% of the people typically use 90% of the health benefits. A group policy gets weighted down by the costs of that 10%. Take them out of the equation and costs come down considerably." Moreover, small employers in particular are not set up to deal with the administrative headache group health plans entail. Directing employees toward their own individual policies takes them out of that cycle. "The trend is toward saying, ‘Secure your own. We will give you a raise to cover the costs,'" says Paschke.

This approach is particularly effective in the affinity market, where professional groups can offer policies to individual members at negotiated rates. "We tell realtor groups, medical groups, alumni groups that we will hook them up with the affinity discount," Paschke says. "Their employees will get the bill at home taking the employer out of the administrative loop."

Brown & Brown has used its clout to negotiate with Blue Cross/Blue Shield for discount rates with various affinity groups, Paschke reports. Members compensate their employees for the policies with higher salaries.

How does this work for the broker? "We sell the individual policies and collect the commissions," he says. "And the commissions on individual policies are generally higher than group."

Re-engineering
Utah-based Zane Benefits has taken this model one step further with ZaneHRA—a platform that uses health reimbursement accounts as a tool to allow employees to choose their own health insurance policies and pay for those policies with HRA dollars. An HRA is a defined-contribution plan vehicle created by the IRS to allow employers to reimburse their employees for qualified medical expenses that are typically not covered under most health insurance plans. HRAs are sometimes referred to as Section 105 plans after the section in the U.S. tax code that governs them.

These plans are akin to Health Savings Accounts (HSAs), but they are different in a key way. Both plans are sometimes used by large employers that offer comprehensive benefits and want to supplement them by giving employees tax-free dollars for non-covered medical costs. An HRA, however, is funded solely by the employer; it cannot be funded by employee dollars. Employers can write off the expense for tax purposes, similar to more traditional health benefits, while the money does not count as taxable income for employees. And HRAs can be designed as a standalone benefit or coupled with a health plan. HSAs, by contrast, are controlled by the employee rather than the employer. Both employees and employers can contribute to an HSA. They also differ in that employees can use the money in an HRA, but generally not an HSA, to buy health insurance. This is key to the Zane Benefits approach.

The ZaneHRA platform includes two distinct products: SimpleHRA and GroupHRA. SimpleHRA is designed for employers that do not offer group major medical coverage. GroupHRA is essentially a high-deductible, consumer-directed health plan.

Both platforms are broker-friendly. "The carrier is of no consequence to us. We do not sell the insurance; we provide the platform that enables the broker to provide this option to his or her clients," explains Paul Zane Pilzer, the company founder. Zane makes its money with a $6 to $12 fee per account. Employers that sign on can establish an HRA for each employee and make a fixed, monthly, tax-free contribution (e.g., $200/month) to that account for each employee to purchase his or her own individual/family health insurance. Employers get online administration, real-time reimbursement and a plan document. Employees are given access to a Web site where they can review individual insurance options. That Web site can be linked to a benefit broker's Web site, or employees can get advice from Zane's 200-person call center of non-commissioned agents. Either way, the delivering broker gets the sales commissions.

The Zane Benefits' approach is controversial. Some experts question whether this approach violates a federal law requiring that employers offer coverage to everybody or nobody. The state of Texas has thrown up some barriers that have caused Zane to stop marketing HRA reimbursement for health insurance there. Others question the ethics of promoting a solution that is centered on cutting less healthy people out of the pool. They argue that the concept violates the fundamental principle of health insurance: that the healthy help to pay for the coverage of the sick.

But Pilzer is undeterred. He reports that 45 states now allow carriers to sell individual and family policies to healthy people for one-third the price of a typical employer group plan—often from the same carrier—and that at least 34 states have a high-risk pool for people who can't get insurance because of illness. He also notes that so far there has been no IRS or federal government pushback.

"With individual plans, once accepted, premiums cannot generally be increased or coverage dropped for future illness. Under a group plan, workers who lose coverage when they are laid off or lose jobs may not be able to replace it," says Pilzer. Faced with a gradually declining group insurance market, some carriers are paying attention.  Case in point? UnitedHealth has given the Zane approach its support by encouraging its agents to consider this approach. 

Revolution Engineering
Extend Health is another innovator offering a turnkey approach to individual health insurance policies for employees. The company is partially owned by Revolution Health—the free consumer health and medical Web site founded by AOL co-founder Steve Case. Its market niche is delivering access to a nationwide marketplace of health plans through two programs: ExtendAccess and ExtendRetiree.

"These products allow employers of any size to offer health insurance options to their employees, particularly employers with populations of contract or part-time workers," says Brian Tenner, senior vice president of Extend Health. The firm's roster of clients runs the gamut from small employers to FedEx, Avon, IBM, Walgreen and GE. The products are also offered to members of affinity groups, such as Sam's Club, adds Tenner.

ExtendAccess provides affordable medical plan options to employees and independent contractors who are ineligible for company sponsored group health plans. It is for employers that would like to provide all or a portion of their active employees access to Extend Health's health care marketplace but will not be providing a financial contribution. Employees get access to hundreds of health plans offered by leading national insurance carriers. They can go online or speak to health plan advisors to choose the plan that best fits their needs and budget. In addition, ExtendAccess provides communications materials for employers to distribute to employees about purchasing a health plan. "What is key here is that we provide service on a national basis. So companies with multi-state locations can offer their employees advice and access tailored to their locations," adds Tenner. And if an employer is looking at a limited-benefit plan strategy, ExtendAccess also provides negotiated rates. Typically, Extend Health sells directly to the employer without the involvement of a broker. "But, if a broker has a relatively sizeable affinity group, we'd like to talk to him," says Tenner.

ExtendRetiree allows employers to replace legacy group retirement plans for those 65 and older with a defined-contribution alternative. "Retirees may use these funds to pay for medical expenses. In certain states, they may use the funds to pay for individual Medigap, Medicare Advantage and Medicare Part D plans," says Tenner. ExtendRetiree also allows corporations, union and government entities to comply with recent accounting directives regarding retiree health care obligations. Tenner reports they have built a team of 180 insurance agents to serve retirees at Fortune 500 companies with individual health accounts. "We expect to have about six large clients, including Ford and Chrysler, offering retiree health accounts next year," he says.  "Then we aim to triple that number in 2008."