Managing Renewal Premiums in a World of Uncertainty

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“Most companies have a matching program to encourage employees to contribute to retirement accounts, knowing that the match is an incentive for these workers to sacrifice some consumption today for an immediate return of 50% to 100% on each matched dollar of retirement contributions. The same forces can boost Health Savings Account contributions.”

William G. (Bill) Stuart

Director of Strategy and Compliance

June 25, 2020

Sudden, unexpected events that shake the nation’s economy often are transformative, changing the way we live, work, socialize, and prioritize our finances. The current pandemic will be no different. Already, experts and pundits have speculated on how the work force, the work environment, commuting, pubic and industry gatherings, dining, and education will change because of the pandemic.

Most companies, particularly those whose business operations were  affected most dramatically by shutdowns imposed by state and local governments, are focused on how reopen and rebuild their businesses. That’s going to be a challenge for many, as they’ll need to introduce new sick policies, re-educate employees, reconfigure work spaces, and install equipment to measure body temperatures.

And they’ll need to scrutinize their budgets to identify areas in which they can shift spending to adjust to the new environment. Employee benefits – one of the largest items in most companies’ budgets – won’t escape this scrutiny.

Listed below are some ways that employers can increase the value that they and their employees receive from these expenditures and offer employees opportunities to increase take-home pay. No single proposal is a silver bullet or panacea. But introducing one or several of the concepts below may help companies to fortify their finances, as well as retain and attract talent, as they navigate the uncharted waters that lie ahead.

Adopt Defined Contribution

This is a simple concept that any company that offers multiple medical plan can adopt. Today, most companies still subsidize a fixed percentage of the cost of each plan. If the employer pays 70% of the premium, and the self-only premiums are $500 and $600 per month, the company/employee splits are $350/$150 and $420/$180.

Here’s the problem with this approach: First, employers can’t set their benefits budgets until after open enrollment, when employees have chosen their plan. Second, employee decisions are distorted because they pay only a fraction of the cost of “buying up” to the richer plan.

The solution is for the company to adopt defined contribution. In this example, the company offers $150 to each employee with self-only coverage. Employees who want to buy the richer plan are responsible for the entire $100 premium difference, not a $30 difference after an employer subsidy of $70.

Under this approach, employers can manage can set their budgets with certainty because they pay the same amount regardless of which plan the employee chooses. It creates efficiency because employees must decide whether the richer plan is worth the full premium difference.

As an analogy, imagine telling your daughter that you’ll contribute $25,000 toward her wedding versus telling her that you’ll pay 70% of the final bill. She’ll probably make very different plans under the two scenarios.

Offer a Health Savings Account

HSA-qualified plans have lower premiums than most plans. That’s because of cost-shifting (employees are responsible for more costs before insurance begins to pay) and utilization (employees generally consumer less medical care). Health Savings Accounts allow employees to reduce their taxable incomes and build medical equity to purchase qualified services and goods now or in the future.

Many companies offer plans with high deductibles that aren’t HSA-qualified. Employees are exposed to high out-of-pocket costs without the corresponding tax savings that Health Savings Accounts offer. Companies that swap out their plans with high deductibles for HSA-qualified coverage will give employees a potent financial account to help manage their health and finances.

But it’s not enough for a company to just offer the medical plan. It needs to partner with a Health Savings Account administrator that can provide a robust financial account. And the employer needs to help employees fund their accounts so that they build a “peace of mind” balance to meet their medical, dental, and vision expenses in the future.

An especially powerful but very underutilized approach is for employers to match employee contributions to their accounts. Most companies have a matching program to encourage employees to contribute to retirement accounts, knowing that the match is an incentive for these workers to sacrifice some consumption today for an immediate return of 50% to 100% on each matched dollar of retirement contributions. The same forces can boost Health Savings Account contributions for employees to spend on qualified expenses today or well into the future.

Introduce a Robust Shopping Tool – with Incentives

Most employers offer plans that allow employees and their dependents to receive care from any provider in the insurance network. That’s a problem, since prices for identical services often vary by up to 500% within a geographic market, without any difference on quality (or, more troubling, with an inverse relationship between cost and quality). Most patients are unaware of these cost differences, and the provider community and insurers have resisted steps toward more price visibility.

A handful of independent technology companies have developed tools that provide the necessary cost and quality information. And some put that information on a mobile app, so that patients can discuss referrals with their doctor during a medical visit.

My insurer offers a tool that’s deeply buried in the Web site. You must know where to look to find it. And a lot of services don’t list all the providers – like the expensive hospital nearly. Two years ago, when I needed an MRI of the lower back, the tool showed prices of about $550 for the free-standing imaging center and $1,950 for the hospital.

A robust shopping tool has a mobile app, provides pricing for all providers, and includes quality information. Its integrated with the insurer so that it can run reports showing the company opportunities to save money – “hot spots” where services are expensive and employee volume is high (think the lab or emergency department at a local hospital). Such a tool empowers employees and helps employers develop education programs to redirect employee care. When combined with an incentive – giving employees a cut of the savings for choosing a lower-price provider – the program can reduce claims costs without compromising the quantity and quality of care.

Employees and their dependents can reduce their out-of-pocket costs by shopping based on price. And if the company’s future premiums are based on claims experience, they can save the company and themselves money on future premiums. It doesn’t take too many redirections of care to offset the annual cost of a tool.

Promote Direct Primary Care

Direct-primary care (DPC) providers don’t align with hospital-based systems or join insurers’ networks. Instead, they charge a monthly fee to provide a range of primary-care services via extended in-person visits, e-mail, text, and virtual individual or group visits. They can deliver superior medical and financial outcomes because they understand patient treatment preferences, aren’t obligated to direct care to a particular hospital system, and can help patients navigate specialty care. The result: Patients often opt for less aggressive treatment when a trusted professional lays out their choices. And their doctor can steer them to providers whose price-to-quality relations are best.

Under guidance proposed by the Trump Administration earlier this month, companies can fund a Health Reimbursement Arrangement (HRA) for employees to pay a monthly DPC fee. It may be an appropriate investment.

Integrate an HRA

A conservative approach is to increase the deductible (thus reducing premiums for both employers and employees) and adding a back-end HRA. For example, a company can move from a $1,500 deductible to a plan with, say, a $5,000 deductible and an HRA that reimburses the final $3,500 of deductible expenses. The company, not employees, funds the account.

This approach works especially well for small companies with good claims experience (their premiums aren’t based on their experience) or larger companies with a small percentage of high claimants (who drive premiums higher). The company in effect self-insures the first $5,000 of the deducible, after which the insurer begins to pay.

The company also has the flexibility to increase the net deductible by setting the reimbursement point on the HRA higher in the future – perhaps increasing it to reflect the rate of medical inflation. Or it can lower the reimbursement point, thus reducing the net deductible, to attract or retain talent.

Introduce an ICHRA

An Individual-Coverage HRA is another form of defined contribution (see above). Employers drop their group medical plan and instead give each employee a tax-free stipend to purchase coverage in the nongroup market. That stipend usually varies according to age and family size (since these variables affect nongroup premiums). Each employee shops for the coverage that works best for her or her family.

Companies maintain control over their benefits budget when they adopt this approach. They have the flexibility to increase their contribution in the future to match market premium increases, the increase in their benefits budget, or any other measure.

Match Health FSA Elections

Few employers match employee elections to a Health FSA or seed a balance without requiring a match. But they should consider this approach – particularly the match, which encourages employee elections. Employee make pre-tax elections to these accounts, so they avoid federal payroll and income taxes, as well as state income taxes (if applicable). That gives them higher take-home pay.

Employers benefit as well. They avoid their portion of FICA taxes (saving $76.50 for each $1,000 of employee elections). And they have a more satisfied work force.

Employee participation in a Health FSA program generally runs between one-fifth and one-third of eligible employees. With a dollar-for-dollar employer match of the first $500 that an employee elects (which doesn’t count against employees’ election limit of $2,750 in 2020), participation increases sharply.

Reimagine and Redesign Coverage

This is the most radical approach. But it’s entering the mainstream as a growing number of employers adopt this approach. They’re not buying a prepackaged insurance product. Rather, they’re working with an advisor or administrator to design their own custom program. They’re incorporating direct-primary care (to promote wellness, access to care, and independent referrals based on price and quality), centers of excellence and medical tourism (to send patients to providers who deliver the highest quality outcomes at competitive prices), reference-based pricing (to promote value), steerage incentives (to encourage employees to choose providers who score high in price/quality rankings), and hands-on navigation of the healthcare delivery system. This is a powerful tool that, in the right hands, can produce more dramatic results than any of the approaches listed above. But it’s not an all-or-nothing approach, as many of the strategies already discussed can complement (or substitute for) this approach.

Bottom Line

For most employers, medical costs are a Top Five expense. They diligently review their costs of real estate, raw materials, human talent, distribution network, business travel and entertainment, and other relevant costs. But too often they take a hands-off approach to receiving the same value for their medical spend that they demand of other expenditures. There are alternatives – a particularly welcome revelation during a tumultuous economic period.

What We’re Reading

Forbes columnist Bob Carlson provides information on how to maximize the benefits of your Health Savings Account. To regular readers of this column, the list is merely a review.

According to a recent survey, the purchasing power of Social Security benefits has declined by 30% during the past two decades. Medical costs are a major reason. A Health Savings Account is just what the doctor ordered.

A handful of insurers are suing CVS, claiming that the nation’s largest pharmacy overcharged their members and the plans themselves for generic drugs. Read my recent analysis here.

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