- The Washington Times - Friday, June 11, 2004

LOUISVILLE, Ky. (AP) — Humana Inc. is dangling the prospect of a guaranteed rate cap to win new business from companies weary of fluctuating, rapidly rising health care costs.

This month the Louisville-based managed care company introduced SmartAssurance, a health plan that caps any rate increase at 9.9 percent in the second year. Analysts said skyrocketing costs had prevented managed care companies from offering multiyear contracts for years and that Humana’s willingness to resurrect the practice could push others to follow.

Humana’s move signaled a moderation in rising health care costs as well as an attempt to move more clients into what are called consumer-driven plans, analysts said. Like other such plans, SmartAssurance provides employees with a set amount in a fund to pay for health needs. Once the fund is exhausted, a deductible is applied to any additional medical expenses before a more traditional health insurance system kicks in. Consumer plans are designed to encourage people to make better choices about their health care, and hopefully save money in the process.

Consultants said Humana is not taking a huge risk with its guarantee because insurers are estimating medical costs will raise about 9 percent to 10 percent this year. Still, they say it is somewhat of a gamble because health care costs have been known to fluctuate wildly, so employers may appreciate the certainty of the offer.

“It is a manageable risk for Humana,” said Segal consultant Ed Kaplan. “For companies that want a stop-loss it is attractive.”

Humana introduced its consumer-driven product called SmartSuite in 2001 and it has 145 corporate clients. SmartAssurance is an extension of SmartSuite.

Michael B. McCallister, Humana’s president and chief executive, said SmartAssurance would give employers some control over “the most out-of-control portion of their overhead.”

Like other consumer-driven plans, SmartSuite has a host of electronic tools designed to make consumers better purchasers of health care. To be eligible for the cap, participants must agree to use electronic tools. Additionally, employers must be enrolled in SmartSuite to be eligible for SmartAssurance.

Members must use an electronic process each year to select the health plans that fit them best. They answer questions about their previous year’s medical expenses and anticipated expenses for the coming year. They decide what types of deductibles and co-payments they want.

Another electronic tool helps members get the most out of the benefits they chose, and another suggests prescription drug alternatives that are clinically equivalent to but cheaper than the drug chosen for them.

“It’s basically saying consumers can be good buyers, consumers can be powerful,” Mr. McCallister said. “The industry historically has not looked to the consumers for any of the answers.”

Mr. Kaplan said companies like Humana have invested significantly in these electronic systems, so its guarantee may add new customers that will offset that spending.

“Humana has a lot of money to recoup. This gives them more economy of scale,” Mr. Kaplan said.

Hewitt Associates consultant Ken Sperling said the program differentiates Humana at a time when the insurance business is getting more competitive. “This way they don’t have to compete on price,” Mr. Sperling said.

However, he said employers need to look at what the first year of the contract will cost to see if a 9.9 percent increase is a real bargain.

Analysts said the cap is possible because of lower rates of increases in health care spending, and smaller premium increases.

Health care spending per privately insured person increased 7.4 percent last year, down from a 9.5 percent rise in 2002 and 10 percent gain in 2001, according to a report by the Center for Studying Health System Change, a public policy research organization in the District.

According to Hewitt, as companies begin to negotiate health maintenance rates for 2005, the average rate increase being offered is 13.7 percent. But that is widely expected to decrease after negotiations. The average HMO premium increased by 13 percent in 2004 and 16.6 percent in 2003. Mr. McCallister predicted the new offering would bolster Humana’s profits.

“It’s going to grow membership because it’s such a compelling offering for employers,” he said. “And as we grow membership, we grow earnings.”

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