New Ways to Keep Health Care Benefit Costs Down
After salaries, Health care benefits are an employer’s largest employee-related expense, according to the Bureau of Labor Statistics. A 2016 survey by the Society for Human Resource Management (SHRM) pegged the annual cost in 2016 at $8,669 for each employee.
At the same time, employers are seeing medical benefit costs continue to climb at an alarming rate. The Office of the Actuary at the Centers for Medicare and Medicaid Services estimates that total health care spending in the United States will grow at an average rate of 5.8 percent through 2025. That is 1.3 percent higher than the expected annual increase in the U.S. gross domestic product. Recent studies suggest the increase could be five percent or more for group insurance next year.
Some of the reasons costs are climbing include soaring prices for medical services, insurance, prescription drugs and medical technologies combined with unhealthy lifestyles and lack of price transparency.
Obviously, some of these issues are beyond the control of employers, but that hasn’t stopped the search for proven and effective methods to reduce health benefit costs. The 2016 SHRM survey showed that the most successful strategies for controlling health care costs ranged from offering consumer-directed health plans to adopting level-funded health benefits.
Here are a few tactics employers across the country are using to keep costs down while maintaining quality benefits:
Tax-Advantaged Health Plans
There are four types of programs that qualify as tax-advantaged plans:
• Flexible Spending Account (FSA) – Employees can contribute up to $2,600 to their account annually and use the money to pay for medical expenses. They can carry over up to $500 of this to the next year. Employees don’t pay taxes on the money they put into the account. Employers also can make contributions to employee accounts.
• Health Savings Account (HSA) – These are tax-exempted accounts employees can use to pay for eligible out-of-pocket expenses. HSAs must be linked to a high deductible health plan (HDHP). The account is owned by the employee. Unspent funds are carried over from year to year and from job to job. Employees do not pay taxes for the employer’s contributions, and they make contributions with pre-tax dollars.
• Health Reimbursement Arrangement (HRA) – This is an employer-owned account that is funded solely by the employer to help employees pay out-of-pocket medical expenses. HRAs often are linked to high-deductible health plans, but this is not a requirement. Employees do not pay taxes on the employer’s contributions.
• Premium Offset Plans (POP) – Employees make contributions to the plan with pre-tax dollars. They can then pay for their health coverage premiums with the accumulated savings — if there are enough funds in the account. An advantage of the POP is higher take-home pay, since less tax is deducted.
Prescription Drug Costs Managed
Prescription drug costs now account for 30 percent of a company’s overall health care spending, an increase from 20 percent in the early 2000s.
To manage these costs, many employers are requiring employees to:
• Get prior approval from the insurance company before filling a prescription.
• Pay the difference between generic and brand prices.
• Purchase maintenance medications by mail order.
• Try step therapy — which is using less expensive medications first.
Wellness Programs – The Society for Human Resource Management reports that up to 70 percent of health care spending can be attributed to lifestyle choices, such as overeating or smoking. An effective wellness program can lower the number of health insurance claims if employees can be helped to make better choices. The key is to engage employees by using incentives and even disincentives for participating. Wellness programs also must be tailored to individual requirements. No wellness program can be one-size-fits-all. One employee might benefit from an affordable membership to a fitness center, while another would be more interested in a monthly health education seminar.
Shifting Costs – Employers have been shifting plan costs to employees by raising deductibles and co-payments, having employees pay a larger portion of the premiums, and increasing the costs of using out-of-network providers.
Level-Funded Plans – Historically, only large companies could afford to self-fund health care benefits for employees. That has changed.
In a traditional self-funded plan, the employer pays employees’ health care claims, except for the employees’ portion, such as deductibles and coinsurance. The employer then absorbs all the losses regardless of their frequency and severity. Large, well capitalized firms can usually handle these often unpredictable expenditures comfortably. Smaller firms, which lack the cushion of large cash reserves may not be as fortunate.
Level-funding is a way to smooth out the rough parts and is similar to traditional insurance because the employer pays a fixed amount each month. To cover claims that are higher than expected, these employers will buy stop-loss insurance, though larger employers, too, will often buy stop-loss to also better manage their cash flow.