Employee Benefits: Solutions for Your Staff & WalletContain Cost, So Not All is Lost
Understanding the Issue – Higher Health Insurance Premiums
Up, up, and away. That’s one way to describe the soaring costs of health insurance premiums. Here’s a quick look at some key factors that can help put the current situation into perspective.
According to the Kaiser Family Foundation (KFF),
American workers are now digging deeper into their pockets to share the cost with their employers,
which is now pegged at 25 percent.
With the average annual total premium now at $22,463, many employees can pay as much as $6,106, (about $509 per month) for their annual share of their family’s health insurance coverage that’s offered through employers.
The cost of premiums could be even higher for those who work at firms with fewer than 200 full-time employees. According to the KKF, these employees are likely to spend an average of nearly $2,000 more out of their paychecks than their peers working at larger companies.
To make matters worse, premium increases are in addition to the deductibles which employees must reach before their coverage even starts to pay for the health services they receive. Currently, the average deductible for single coverage has risen to $1,500; $3,000 for family coverage.
Today, employers pick up an average of about 83 percent of the health insurance premium cost for their employees. But they may not be able to take on much more. In a recent McKinsey survey, employers reported that future increases will not be “sustainable” for their organizations.
Over the past year, the cost for just about everything from apples to tech has risen. In fact, The Consumer Price Index (CPI), a common indicator of inflation, increased 7.1 percent overall for the year ending in November.
Combined with increased health care spending (that is rebounding from the pandemic) and persistent supply chain bottlenecks (and higher prices) for medical supplies and equipment, inflation and a tight labor market are also contributing to rising health insurance premium costs.
Since 2000, medical costs have risen each year by 4.85 percent. More recently, labor shortages have impacted the healthcare market and will likely require higher wages and salaries in order to attract and retain talent in the sector… which will only add more costs. Prescription drug prices are also to blame.
Employer-based health insurance premiums will increase faster than workers’ wages in the foreseeable future.
Source: Peterson-KKF Health System Tracker
In an effort to curb rising healthcare expenses, Congress passed the Inflation Reduction Act (IRA) this past year. Among the key provisions, it allows Medicare to negotiate pricing for prescription drugs directly with drug companies, and specifically limits the cost of insulin, which is used by 8.4 million Americans. While these reforms are likely to bring down costs for employees and individuals, there’s concern that drug companies will offset the amount of discounts they’re forced to give up by shifting the cost over to employer-sponsored health insurance plans. (And further inflate premiums for both employers and employees.)
While employers have options to help manage increasing costs, none offer an ideal solution. Among them:
Reduce benefits: 95 percent said they would consider taking this action if costs increased four percent or more.
Increase the portion employees pay for health insurance premiums, which could compromise current talent acquisition and retention efforts.
Consider offering a high-deductible health plan (HDHP), in which employees pay more out of pocket for health services (until they reach a certain amount) in exchange for paying lower premiums upfront.
Unfortunately, all these options transfer added costs in one way or another on to employees. Fearing further losses in their workforces, employers are not eager to make such changes.
With additional increases to cost sharing seemingly out of the question at this time, how can employers continue to balance the need to offer valuable health insurance coverage to their employees but at a rate that their organizations and employees can afford? Consulting a professional benefits broker who has deeper insights into the market can provide the necessary guidance for moving forward during this challenging time. Brokers can use various analytic tools along with their expertise to structure comprehensive, cost-conscious health insurance benefits for organizations of all sizes.
Strategies to Manage the Issue – Identifying Alternate Funding Options to Combat Rising Costs of Health Benefits
Pay. Pay more. Repeat. That’s the cycle employers are stuck in as they deal with the continual cost increases of providing health insurance benefits for employees.
For the 12-month period ending September 30, 2022, the cost of providing benefits to U.S. employees rose five percent.
Fortunately, there are strategies beyond traditional, fully insured models that could help employers effectively contain costs. Among those alternate funding options:
Unlike traditional, fully insured health plans, self-funded plans allow employers to pay employee healthcare claims from their own funds instead of buying insurance from a health insurer (and paying a premium upfront). Employer and employee contributions are usually set aside(“reserved”) to pay the claims, and a third-party administrator (TPA) provides claims administrative services.
- Allows more control over health insurance costs and budgets
- Improves cash flow because premiums aren’t prepaid to a separate insurer
- Provides the flexibility to customize coverage and contract with healthcare providers that best meet their employees’ needs
- Subjects employers to less regulation and taxes than other types of plans
- Provides insight into claims data which can be monitored for more informed risk management that can lead to potential cost savings
- Offers potential for investment income from unused funds set aside to pay losses
- Can limit liability with stop-loss coverage that can pay claims over a certain amount
- Transfers financial risk to employer to pay claims
- Reserved mostly for larger employers who have sufficient funds to pay all costs
- Can be difficult to predict claims from year-to-year
- Makes employer more vulnerable to catastrophic losses, especially if excess insurance is not purchased
- Requires long-term commitment and expertise to set up
Level-funded health plans offer a middle ground between self-insured and fully insured plans. Based on estimates, an employer pays a fixed amount into its own fund to cover claims, TPA fees, and other expenses.
- Offers opportunity for a potential refund if actual claims, costs, and expenses are lower than estimated
- Provides ability to better predict monthly costs and improve cash flow
- Offers flexibility to tailor coverage to workforce and provide access to optimal health networks
- Can offer less financial risk than self-funded plans
- Must pay claims, no matter how much they cost
- Assumes the risk that cost savings can be outweighed by administrative fees
- Can be complex; requires team of experts to assess situation and set up
- Usually reserved for smaller employers
- Places financial risk to pay claims on the employer
Reference-based pricing is typically adopted by self-insured plans. An employer pays healthcare providers a set price (based on standard CMS [Medicare] charges) for various health service and treatments instead of negotiating prices with providers. If the provider wants to charge more money for the service, it can bill the patient for the unpaid amount.
- Offers potential to lower overall healthcare costs
- Caps how much employer will pay for services
- Avoids network contracts, which tend to increase every year
- Limited to out-of-network emergency and lab claims
- Places more financial burden on employees because they can be billed for the balance if the provider wants more than it receives from the employer
- Transfers more of the cost of care to employees and healthcare providers
- Does not factor in quality; only focus is on low-cost providers
- Excludes prescription drugs, a major contributor to rising healthcare costs
According to the National Association of Insurance Commissioners (NAIC), “a captive is a wholly owned subsidiary created to provide insurance to its non-insurance parent company.” A form of self-insurance, a captive lets organizations take financial control of insurance costs by acting as their own insurance company instead of paying premiums to a separate a health insurer.
- Lowers potential for escalating renewals every year and provides more stable pricing
- Offers tailored coverage based on organization’s needs and claims experience
- Offers the opportunity to cover a variety of product lines beyond employee benefits, including general liability, property, professional liability, workers’ compensation, etc.
- Can exert greater control over claims by instituting more risk management
- Expands control over cash flow because premiums are paid and retained within the arrangement; not paid out to a separate insurer
- Offers potential tax benefits if the arrangement meets certain IRS rules
- Offers a range of structures, including: single-parent, group or association, segregated cell, agency, and risk retention groups
- Provides access to reinsurance market to transfer risk above $250,000
- Provides the opportunity to benefit from loss control incentives
- Takes time; requires independent actuarial study to set up
- Requires long-term commitment
- Puts employer’s own capital at risk if claims rise
- Can be expensive; minimum $500,000 annual premium
- Can be confusing with many details to consider
- Must have substantial financial resources to keep sufficient reserves to pay claims
- Requires expertise to establish correctly
TIME TO THINKN ABOUT YOUR OPTIONS?
It’s important to talk to your broker about which options are best for the size of your organization. For an expert assessment of your current benefits plan and more guidance about which cost-containment strategies may be right for your organization, contact a member of our Employee Benefits team today.
Contribution modeling is when employers choose a health plan for their employee population, then determine the dollar amount they’ll cover and the premium amount employees will be responsible for according to a cost-share model. For example, if an employer covers 80 percent of the cost of the plan, the employee would be responsible for the remaining 20 percent.
As healthcare costs continue to rise, employers are looking for effective ways to contain costs. One way is to leverage contribution models to allow both employers and employees to share the cost of ever-rising health insurance premiums so it’s easier for both to afford.
Given today’s war for talent, finding an optimal premium cost-share arrangement is key. Striking the right balance between reining in costs and offering valued health insurance benefits can make a difference for successful talent acquisition and retention.
In 2022, employers contributed an average of 80 percent of the premium cost for individual health insurance coverage and 67 percent for family coverage.
3 QUESTIONS EMPLOYERS CAN ASK WHEN CONSIDERING CONTRIBUTION MODELS:
How can you leverage benchmarking to choose the right contribution model for your organization?
90/10? 80/20? 75/25? Knowing how similar-size companies in the same industry and location are sharing the cost for health insurance premiums with employees can provide a valuable baseline for thinking about the type of model to consider. This important data not only gives a window into what peer organizations are doing, but it can also begin to pave the way for developing an effective long-term strategy.
What is the organization’s view of benefits offerings?
Some employers are focused on offering offer the best of everything to their employees, including high salaries and robust, albeit expensive, benefits. Others want to offer their employees high salaries only coupled with the best possible health benefits they can afford. Still others seek to minimize salary and benefits spend (in favor of offering equity in the company, for example) and consider price as the number one factor when deciding about benefit offerings and how to share costs. The point is how an employer views benefits can be a major factor in ultimately deciding what contribution model to use.
If offering the “best of the best” to employees is the main focus, for instance, then it’s likely that an employer will choose a model that picks up a bigger share of the cost.
How do benefits fit in an overall compensation strategy?
Since employee benefits typically fall within the top three line items for an organization, it’s not only an important part of employees’ health and well-being, but it’s also a vital part of a company’s finances. So, making sure any contribution model is in synch with an organization’s overall philosophy for compensation can be an important part of an employer’s story and corporate culture, especially meaningful for attracting and retaining talent.
While the answers to these strategic questions can help provide a foundation for establishing an appropriate contribution model, employers should also consider other factors, including:
In general, younger workforces can be healthier and need fewer health services while older workforces typically need more medical care for conditions developed over time. So, knowing the demographic makeup of an employee population can help employers make decisions about how to structure the most appropriate model for their organization along with what benefits may be most appreciated. For example, older employee populations tend to value health plans with lower deductibles and out-of-pocket maximums since they likely have a greater need for services versus younger workers. (But those types of plans typically come with a higher premium cost.)
Affordable Care Act (ACA)
In designing a contribution model, employers must also keep in mind ACA regulations to offer a “qualified” plan and avoid penalty fees. For organizations with 50+ employees, ACA mandates the following:
- provide affordable, comprehensive health insurance coverage to 95 percent of employees
- cover at least 60 percent of employees’ medical care
- substantially cover doctor and inpatient hospital care
- provide minimum essential coverage that meets all ACA requirements and follows limits on cost sharing
For complete details and requirements, visit: irs.gov.
No matter how an employer ultimately decides to share health plan costs with its employees, it’s crucial to educate employees about it. Communicating how the model fits the organization’s philosophy about health insurance benefits allows an organization to tell its story to potential new recruits and demonstrate its commitment to existing talent.
THE BOTTOM LINE
There are many factors to consider when structuring an appropriate contribution model for sharing health plan costs with employees. If you need assistance, contact one of our benefits advisors who can help guide you through a comprehensive process to tailor a strategy that meets your organization’s goals.
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Contact one of our trusted advisors who can help guide you through a comprehensive process to tailor a strategy that meets your organization’s goals.
This material has been prepared for informational purposes only. BRP Group, Inc. and its affiliates, do not provide tax, legal or accounting advice. Please consult with your own tax, legal or accounting professionals before engaging in any transaction.