The Rising Cost of Health Insurance

In today's employee benefit marketplace it is becoming increasingly difficult to get more for your employee benefit dollars this year than in years past. Many factors have contributed to the rising cost of employee benefits, especially group health coverage. As our population ages, the demand for medical services is increasing. New treatments and technology come with a hefty price tag, and we all want access to the very best health care available. Advertising is pushing the demand for prescription drugs to record levels. More Americans are on some type of prescription drug than ever before. Due to Medicare cutbacks, providers are shifting part of the costs of treating some patients to other consumers, primarily individuals covered by private insurance. Federal and state regulations, especially in the small group marketplace, have put tremendous pressure on rates and the ability of insurance carriers to maintain expectable profit margins.

Far too many employers have fallen into the trap of just trying to shop their employee benefit program each year in order to save a few dollars, only to realize 20 percent or higher rate increases the following renewal. This is a vicious cycle that usually leaves both the employer and the employees frustrated each year, especially when benefits begin to erode and costs continue to climb.

Fortunately, there are answers and alternatives that employers can implement to help control, manage and - more importantly - budget employee benefit costs; not just for this year, but for the next several years to come. There are strategies available to both healthy and unhealthy groups. These strategies can usually be implemented effectively for most groups from five to 5,000 employees. The primary goal is to allow the employer greater control of his or her employee benefit expenditures and to protect as much of each year's employee benefit premiums from future rate increases as possible. Two very popular strategies are defined contribution plans, tax-favored Section 125 plans making effective use of voluntary and work-site products.

Defined contribution plans simply allow an employer to budget a specific dollar amount, which will be provided to each employee for benefits. The employer then provides multiple plan design options from which the employee can choose. Employees have the freedom to choose a plan that most fits their lifestyle and maximizes the employer's contribution, while the employer can more effectively budget and control employee benefit costs from year to year.

Employees have the ability to control the level of benefits they desire along with the amount of premium they are willing to spend. The young and healthy employees may choose a high-deductible option that allows for nearly 100 percent of the premiums to be paid by the employer, while the employee with health issues may be willing to pay more for a lower-deductible option. The employees who are using the benefits and driving up the premium costs tend to pay more while allowing the healthier employees the ability to continue to afford coverage. At renewal, when premiums are raised, the employer has the option to raise the amount of the defined contribution or leave it the same. This allows the employer to really budget and control his or her employee benefit cost. The employee has the choice to pay the additional cost for the health insurance or choose an optional plan design, which will defray the increased cost. Employees appreciate the ability to make that decision for themselves, versus the employer mandating that "we are raising deductibles and all employees will be paying more for their employee benefits coverage."

A few key points to designing a successful defined contribution plan is that each plan option maintain an affordable office visit co-pay, an emergency room co-pay and a prescription card. Eighty-five percent of all claims will be in these three areas. Very few employees are hospitalized or have expenses that require them to pay their deductible during a given year. The employer can offer an HMO, POS or PPO combination and still use the defined contribution approach.

Another great tool in reducing your overall employee benefit costs is to reduce your overall tax liability. By instituting a tax-favored Section 125 plan you will be able to provide your employees a raise in take-home pay and reduce your overall employment tax liability. These plans can usually be set up with little or no cost to the employer and allows for the portion of the benefits premium paid by the employee to be payroll deducted on a pre-tax basis.

Many employers have been pressed to provide ancillary benefits such as dental, vision care and short-term disability. Most groups with five or more employees can now offer these benefits along with a host of other group benefits on a strictly voluntary basis. By coordinating your voluntary benefits program and work-site benefits with a Section 125 plan, your employees will be able to customize a benefits program that meets their individual needs on a payroll-deducted, pre-tax basis. In reality, "Uncle Sam" is paying a portion of their employee benefits premium. The employer reduces the overall payroll tax liability for every dollar spent by the employee for these voluntary or work-site benefit products.

Many times, the employees can purchase these products on a payroll-deducted, pre-tax basis and see very little change in their take-home pay. A Section 125 plan allows the employer to actually give each participating employee a raise in their take-home pay at no cost to the employer. In actuality, the employer is being rewarded for this benefit in a reduction of FICA tax they are required to pay on behalf of the employee.

By providing this cafeteria-style approach of providing ancillary benefits, the employees can personalize their choices and only purchase products that benefit their specific situation or need.

Combining the Section 125 plan and voluntary ancillary products along with the defined contribution approach to employee benefits will allow the small employer the ability to offer a benefits package that equals many Fortune 500 companies. This will help with employee retention and satisfaction. Employees like the freedom of choice and having their tax dollars diverted to pay for benefits, while the employer appreciates the ability to finally budget and manage his or her employee benefit costs while reducing overall tax liability.

The good news for you is that the next time you are faced with a double-digit renewal increase, you can use one or more of these solutions to regain control of your employee benefit program.