As employers continually explore a wide array of potential health benefits changes to curtail ever-rising costs, some are working at the margins, chipping away at expenses and redistributing them among employees.

Generally, these less-sweeping efforts come down to small yet significant changes that affect employees' share of the burden of their own health expenses. The changes typically apply only to certain segments of a company's workforce--those with spouses, for example, those with continuing needs for prescription drugs or those at the higher end of the salary scale.

And although the changes that affect such subsets of employees have not yet produced demonstrable cost savings, more employers are willing to give these trimming exercises a try.

Among these incremental steps are spousal surcharges, percentage-based prescription drug co-payments and tiered health plan premiums.

The Marriage Penalty

For many married couples working for separate companies that offer health insurance, it's becoming more complicated to choose which employer offers the best, most cost-effective coverage for the couple's needs. At a growing number of companies, there's a new ingredient in the calculation: a spousal surcharge. It is a monthly cost--generally $50 to $200--that an employer tacks on to an employee's premium when coverage includes a spouse who could get coverage through his or her own employer. (Surcharges don't apply, as experts note, for spouses who are not employed or who work for companies that don't offer health insurance.)

"Based on what we are hearing from the marketplace, anywhere from 5 percent to 12 percent of employers are using spousal surcharges," says Wayne Wendling, senior director of research at the International Foundation of Employee Benefit Plans, a 35,000-member organization of benefits and compensation specialists, based in Brookfield, Wis.

In a recent e-mail survey conducted by the Society for Human Resource Management among its members, 11 percent said their companies levy monthly spousal surcharges, which range from $18 to $464 and average $156. Moreover, 3 percent said they simply refuse to cover any spouse who can be covered under another employer's plan.

Wendling says the use of such surcharges has been growing in the past two years. "A lot of employers who are still struggling to provide health coverage are concerned about being selected against"--that is, chosen by employees' spouses because these employers "are providing better benefits," he says. "It's costing them more, and they are doing this to encourage spouses to take advantage of the health care that is available in their own offices."

"What the surcharge is really about," says consultant Tom Billet of Watson Wyatt Worldwide, "is establishing the principle that a company should not be the primary provider of health insurance to the dependent of an employee who has available insurance coverage elsewhere."

Currently, working couples' children are not affected by surcharges. When spouses elect separate health plans, they can have their children covered by whichever employer's plan is the better option. But some companies, eyeing the costs of insuring larger families, are moving toward--or at least considering--a per-dependent or per-person premium arrangement.

Whether spousal surcharges save money for an employer is still uncertain. While "companies may accept on faith" that surcharges cut costs, Billet says, "I've never seen any hard information to confirm that."

In fact, the administrative and communication tasks that go along with spousal surcharges can make the tactic more burdensome than beneficial. Paul Devore, CEO of Financial Management Services, an Encino, Calif.-based company that serves as a benefits broker for companies, notes that simply keeping up with changes in benefits can be a full-time task for HR professionals at small and medium-sized companies.

Certainly, establishing a surcharge arrangement can present HR with challenges, not the least of which is communicating the reason for the change. "There's a natural backlash when you have to sell cuts to your workers," Devore says. "Our HR clients explain [to employees] that if small changes such as this aren't made, there is a good possibility that the company will have to reduce [overall health] benefits."

Instituting the surcharges also requires procedures for determining if an employee who elects spousal coverage is subject to the surcharge, and it requires additional financial procedures for handling the surcharges.

Then, after a program is under way, questions can arise over what to do about employees who are found to have misrepresented the status of a spouse's access to health care in another organization. Is it a cause for termination or for a slap on the wrist?

"We have not really looked at what happens if the spouse is dishonest about the availability of other coverage," says Wendling. "We do not know what type of HR consequences there may be." Nonetheless, he continues, "if it is determined that the spouse did not enroll when he or she should have, a company may choose to have the claims [recalculated] according to the terms of the plan, which could leave a large unpaid balance for received health care services and which becomes the responsibility of the employee."

While large companies may have the HR resources to set up and monitor a surcharge arrangement, Devore says, "smaller employers, such as those with fewer than 1,000 employees, often don't want to be bothered with having to do the restructuring that a spousal surcharge would require, and their carriers may not offer the flexibility to accommodate that."

Paring Employers' Drug Costs

As employers see their prescription drug coverage expenses soar, some are deciding that their health plans' participants have to take on more of that burden as well, at least partly to raise their awareness of drugs' true price tags.

The most familiar type of prescription drug cost-sharing with employees involves setting co-payments according to a system of tiers for drugs. First-tier drugs are generics, typically the least expensive types of drugs. The second tier generally consists of brand-name drugs listed as preferred, which usually means they're purchased in cost-saving bulk quantities. Third-tier drugs are brand names that are not on the preferred list and thus are the most expensive.

Employees' co-payments are often flat amounts according to the tier in which the drug falls--the higher the tier, the higher the co-pay. Moreover, co-pays apply whether the prescription is filled at a neighborhood drugstore or by a pharmacy benefits provider aligned with a health plan and offering discounted prices, typically for drugs used for extended periods.

Under the tiered prescription plan at Washington University in St. Louis, for example, employees pay $10 for a generic drug, $25 for a brand-name drug on a preferred list and $50 for a nonpreferred brand-name drug.

"We began doing this in 1999," says Tom Lauman, the university's director of benefits. "We wanted to be consistent with what others were doing and to provide some co-pay for those very expensive drugs." Nonetheless, he adds, the co-pay arrangement is reviewed each year against the backdrop of another, increasingly popular approach: percentage-based co-payments.

Under a system of percentage co-pays--regarded by some as the next step in having employees share in drug expenses--employees are required to pay a fixed percentage of the cost of each prescription rather than a flat co-payment. Again, drugs are grouped in tiers, and sometimes the percentages rise with the tiers. "We typically see a 20 percent coinsurance rate for the first tier of drugs for those plans that use coinsurance and up to a 40 percent coinsurance rate for the third tier of drugs," says Wendling.

"In 2000," Wendling adds, "about 16 percent to 17 percent of our respondents were using a percentage of the cost. But recently another survey reported an increase from 26 percent to 30 percent in a single year. What this really is about is trying to encourage employees to use generic drugs rather than brand-name drugs."

Although there's little hard data on cost savings that result from switching to a percentage arrangement, Wendling says employers who have instituted that system have seen an increase in employees opting for generic drugs.

Another approach that some employers are adopting for their prescription drug plans is a percentage co-pay with a minimum of, say, $50. Other ideas gaining attention include requiring employees to meet a deductible of perhaps $100 before prescription benefits kick in, and setting annual maximums of perhaps $1,000 on individuals' drug benefits.

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