Medical Savings Accounts Study: Case Studies
Dominion Resources, Inc.

• Sponsor: Dominion Resources, Inc. (Utility Holding Company) Located in Richmond, Virginia

• Coverage: Choice of 3 Comprehensive Health Plans (networks)

• Number of employees: 196

• Summary effect of plan: Substantial savings distributed each year to eligible employees; employer health plan costs level for 5 years

• Year of origin: High deductible health plans adopted in 1989

Prior to 1989, Dominion Resources, Inc. provided traditional employer sponsored health benefits for its employees. Recognizing basic problems with this approach and concerned about high annual increases in premium, Ken Davis, Dominion's Corporate Vice President, installed a revised health benefit plan. Dominion Resources used an important philosophic base for making changes to their health benefits plan. "Employer provided health insurance should in fact focus on health, be structured like [true] insurance, and delivered as compensation."20

The components of the Dominion plan are:

1. Health component;
2. Insurance component;
3. Compensation component.

They are connected in important ways by using incentives where incentives count. The assumption is that, given the opportunity and information, people do know how to spend their money to meet their health needs and preferences.

Features of the Health component:

1. Incentive cash payments of up to $50 per month are made to employees who adopt and maintain healthy life-style activities.
2. Dominion pays for targeted preventive care and the timely use of certain diagnostic tests.

Features of the Insurance component:

1. Sufficient funds are retained in company self-insurance reserves to provide catastrophic coverage.
2. Employees may choose from three different deductible plans.
3. The savings from reduced insurance premiums help to finance first dollar coverage and fund the Medical Savings Accounts.

"The assumption is that, given the opportunity and information, people do know how to spend their money to meet their health needs and preferences."

The Compensation component is treated as follows:

Dominion Resources treats medical benefit expenditures as a part of compensation. The guiding idea is that compensation is based on contributions that individuals make to the success of the company or business enterprise. Medical benefits and claims for services are based on each individual's consumption of those services. Savings result when Dominion pays less than planned.

Year-end savings are divided between the company and the employees; one half is retained by the company and placed in self-insurance reserves against future claims costs. The other half of year-end savings is allocated to all employees who did not claim any reimbursement for services beyond the deductible. Dividing the savings between the company and the employees contributes to the company's success and rewards employees for holding down medical spending.

Each of the three health plans offered vary only in the level of deductible and accompanying coinsurance. To help employees identify the trade-offs involved, a cost-to-claims comparison table displays considerable detail.

Whereas only 23% of employees chose the high deductible plan in 1991, 68% did so in 1994. In 1991, 63% selected the lower deductible health plans with 20% coinsurance. Twenty employees waived participation in any plan, and thirty-three chose the $1500 deductible plan with no coinsurance. In 1994, only 17% elected the low deductible plan.

Employees and their spouses are also making clear choices about life-style and incentive programs. Since 1992, participation in cash-based incentives has increased from thirty-two to seventy-seven employees. Annual health credits paid by Dominion increased from $4000 to $30,000 from 1992 to 1994.

Flexible spending accounts (IRS Section 125 plans) remain popular with seventy-five employees who set aside an average of $1000 in these "use it or lose it" medical spending accounts. Thirty employees use MSAs, with payroll deductions in 1994 averaging $1000 for the year. Expenditures made from those accounts are not known because they are specifically individually owned. Dollars deposited are post tax dollars, and use of them is known only to the individuals owning them.

"Dividing the savings between the company and the employees contributes to the company's success and rewards employees for holding down medical spending."

What have been the results of this high deductible, network-based health insurance benefit first made available to Dominion employees five years ago?

Conclusive financial data is available for the period from 1990 through 1994. The actuarial cost increase per participant was 0% over the four years. Total company spending on health benefits as a percentage of payroll was consistently below 5%. From 1990-1993 the state of Virginia averaged yearly medical spending rate increases of 18%.

One of the popular elements of the Dominion health program is the Share the Savings Program started in 1992. That year the sharing plan saved $67,617 dollars. Dominion retained half of its share to cover possible future losses. The distribution formula meant $66.16 per month of participation for each employee whose claims did not exceed the deductible in 1992. Employees enrolled for the entire year received cash awards of almost $800 each.

Dominion's medical spending per active employee was just over $2000 in 1992. This was $932 less than Dominion budgeted per active employee for the year. Had medical claims consumed all health benefits and premiums, the spending per employee in 1992 would have been nearly $3000.

The 1993 Share the Savings Program produced a smaller payout of $38 per month. Each qualifying employee who made no medical claims in excess of the deductible, (regardless of the selected deductible plan) received an award of $456. Dominion's actual medical spending paid in 1993 averaged $1884 per active employee. Dominion's budgeted spending for the year was $2421.

1994 projections showing Dominion's health plan spending of $1700 per active employee have proven true. If that latter figure holds, Dominion's medical plan spending in 1994 was less than 3% of payroll—a remarkable achievement.

According to Dominion staff, there is no evidence to suggest that employees and their family members are avoiding preventive care or not using medical services merely to save money. Nor is there any suggestion that only the sick are choosing the low deductible health plan.

What are Dominion's administrative costs?

In 1994, Blue Cross received 7% of overall plan costs for administrative services, network access fee, and utilization management. Blue Cross is not at risk for this self-insured plan. Internal administrative spending is absorbed in the total human resources and benefits budget. (Dominion data provided by Anne Grier, Sr. VP Dominion and Ken Davis, Corporate VP Dominion.)

"...there is no evidence to suggest that employees and their family members are avoiding preventive care or not using medical services merely to save money."

"Nor is there any suggestion that only the sick are choosing the low deductible health plan."

Why does the Dominion Resources plan stand out?

The basic philosophy that "Employer-provided health insurance should be focused on health, structured like insurance, and delivered as compensation" distinguishes the Dominion plan from others. Many employees enroll in the "spend it or lose it" flexible benefit, Section 125 plan. Some enroll in the Medical Savings Account plan. Few employees choose the low deductible plan. The Dominion plan offers choice, flexibility, and health incentives that means good personal and economic well being for this company and its employee family.

Key characteristics of the Dominion plan are:

• The employee is placed in the center of health care transactions and they understand whose money is being spent and for what purpose.
• MSAs are incorporated as an employee choice.
• Health plans with varying deductibles are offered.
• Effective self-insurance structures are used.
• Preventive care and healthy life-styles reinforce financial self-efficacy measures.

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org