“A far more effective approach is defined contribution. An employer offers a flat contribution to each employee . . . When employees pay the entire difference in premiums, they tend to choose the less-costly plan. And employers can set their budgets well in advance, since they’ve fixed their cost per employee.”
William G. (Bill) Stuart
Director of Strategy and Compliance
October 31, 2019
Large and most mid-size employers made their benefits decisions long ago and are in the midst of open enrollment. But small groups and companies with 51 to 99 employees eligible for benefits are, in many cases, just receiving their 2020 renewal premiums. And for some, the increase has been shocking.
What to do? Here are some ideas that other companies have instituted to manage the ever-increasing cost of coverage:
Educate Employees about Benefits
Patients, like the rest of us, tend to do what they’ve always done. When a child is sick, they run to the physician. When they roll an ankle playing basketball at night or on a weekend, they visit the emergency department at the local hospital.
There are less expensive (and, as a bonus, more convenient) alternatives to receive appropriate care. And they’re most likely built into the medical coverage. But employees typically don’t know about them.
Most insurance plans have integrated a telemedicine benefit. A telephonic consult is an effective way to diagnose and treat simple conditions. Patients access a physician through a smartphone or computer with a camera. The doctor can look at and evaluate a sore throat, rash, or skin blemish, guide the patient through some tests (“Press against the glands on the side of the neck. Does that hurt?”) and make an accurate diagnosis for a fraction of the cost of an office visit.
Employees also need to understand the role of retail clinics and urgent-care centers. They’re often convenient and appropriate alternatives to the emergency department. Retail clinics are staffed by nurse practitioners who limit their scope of practice and follow checklists and perform simple tests to diagnose basic conditions like strep throat, ear infections, and eczema. They’re usually located within retail pharmacies, which makes filling a prescription easy. And the cost is usually less than $100 or less, which is lower than most physicians’ contracted rates.
Urgent-care centers are typically stand-alone facilities staffed by doctors and other professionals (like nurses and paramedics). They often have imaging equipment and durable-medical equipment in inventory, so they can diagnose and treat that rolled ankle. The cost of care can be one-half to one-third the cost of similar services delivered through a hospital emergency department.
Family premiums today often exceed $25,000, of which employers typically pay between $15,000 and $20,000. How much would you pay employees not to enroll in your coverage, but instead enroll their family on their spouse’s company’s family plan?
A growing number of companies offer employees payments if they don’t enroll in employer-sponsored coverage. And if the payment is high enough, employees respond. But what constitutes high enough? Some couples enroll in one company’s coverage or the other out of pure habit. Most, it’s safe to assume, do take a look each year and choose the plan that offers better coverage: a regional insurer with a broad network versus a national plan with fewer provider choices, lower out-of-pocket costs, lower payroll deductions, no referrals for specialty care, or coverage for out-of-network care.
Employers who offer a waiver payment need to set a figure that’s high enough to tip the scales in favor of what today is a less attractive plan to employees and their spouses.
And they have to consider one other figure. The program saves money only if it’s attractive enough to entice couples to switch plans. But a number of current employees may already waive an employer’s coverage, and they’re entitled to the payment as well.
Let’s run a quick example. A company has 50 employees enrolled on family plans, of whom 10 waive coverage. The other 40 cost the company $20,000 each. The company offers a $5,000 payment, which prompts 10 to switch to their spouse’s plans. That’s $200,000 in premium savings. The cost? A $5,000 payment to each of those 10 employees, plus $5,000 to each employee who already waived coverage. That’s a total of $100,000, yielding $100,000 in overall savings.
Had only five additional employees waived coverage, the company would have saved $100,000 and paid $75,000 to 15 employees. Still a savings, but not as much of a game changer.
Offering these waiver payments is a viable way to manage the cost of coverage. But employers need to have the right situation (most employees enroll in coverage, so that the company doesn’t pay too many workers who already waive coverage) and choose the right amount (enough to prompt employees to switch to spouses’ plans without giving back all the premium savings).
Many employers who offer two or more plans pay a percentage of each premium. For example, they subsidize 75% of the $2,000 monthly PPO premium and the $1,600 monthly HMO premiums. This model creates several issues:
- Employees tend to overinsure. If the PPO plan is worth as little as more than $101 more to them, they’ll buy the plan that cost $400 more because the employer subsidizes $300 ($3,600 annually) of the cost difference.
- Employers can’t set their insurance budgets for the year until employees make their benefit selections during open enrollment.
A far more effective approach is defined contribution. An employer offers a flat contribution to each employee (typically adjusted for contract tier, so self-only and family coverage are subsidized with different amounts). The figure is typically pegged to a percentage of the low-cost plan. Employees then must pay the entire premium difference if they choose the more expensive plan.
This approach solves both problems identified above. When employees pay the entire difference in premiums, they tend to choose the less-costly plan. And employers can set their budgets well in advance, since they’ve fixed their cost per employee.
Companies that want to switch to defined contribution may find that they need to phase in the concept over several years. In our example above, employees enrolled in the PPO plan would face a sudden $300 monthly increase in premiums. The employer may need to adopt a three-year strategy of increasing the cost by $100 per month each year to implement defined contribution. Others companies, faced with double-digit increases, may not have the option to phase it in, however.
Another option is to lower premiums by offering plans with select or tiered networks. These plans limit access to providers whose costs don’t reflect differences in quality and outcomes, either by denying access (high-performance network) or making it more expensive (tiered network). These plans essentially relieve patients of the need to shop for care by signaling which providers deliver the most value.
These plans often aren’t popular with employees because they disrupt current provider relationships. But that’s precisely the point of these plans. If a number of employees are disrupted, that’s because they receive care from high-cost providers. Every employee who enrolls and chances providers saves money without sacrificing quality of care. If the switch to a plan with a more focused provider network doesn’t disrupt employees, then the company won’t save money going forward because employees are already receiving care through more efficient providers.
Employers typically offer a limited network plan alongside full-network coverage. Given the choice in a vacuum, all employees would choose the full-network plan. Employers therefore must eliminate that vacuum by assigning an employer contribution to each plan. Adopting a defined-contribution approach can help.
Increase Employee Cost-Sharing
Employees are paying a growing percentage of the cost of their care as plans have increased cost-sharing in recent years. These changes have been prompted by both insurers (who in many cases have limited the menu of products in the small-group market to plans with high deductibles and coinsurance, and adjust their pharmacy benefit annually to pass on more of the cost of expensive drugs) and employers who have tempered premium increases by switching to plans with higher cost-sharing.
Employees with lower claims haven’t felt the brunt of this trend, since they don’t access care frequently. But workers covering someone with a chronic condition, high prescription-drug utilization, or a sudden injury or illness may end up paying thousands of dollars more annually than they did under the old plan with lower cost-sharing.
Employers pondering how to manage a sudden premium spike ask themselves whether it’s better to spread the increase over their entire employee population or ask those who are driving premium costs to pay more for the benefit. That answer will be different for each employer.
But there is a way to blunt the impact of this shift on employees with high medical costs . . .
Stand-alone and Stacked Reimbursement Accounts
Benefits advisors and employers who choose plans with higher cost-sharing are increasingly pairing those plans with Health Reimbursement Arrangements or Health Savings Accounts to reduce the financial burden on employees with high medical costs.
For example, a company facing a large premium increase on its $2,000 deductible plan might switch to a $3,000 deductible, then fund an HRA that reimburses the final $1,000 of the deductible. This approach reduces premiums and keeps employees whole. The company assumes the risk that the premium savings will more than offset the cost of reimbursements paid and administrative fees associated with the HRA. In most cases, they come out ahead.
Companies are beginning to appreciate the value of stacking reimbursement accounts. The approach starts with the employer’s buying an HSA-qualified plan with higher cost-sharing and a lower premium. It then offers a back-end HRA, as described above. The HRA can’t begin to pay benefits until the employee has paid at least $1,400 (self-only plan) or $2,800 (family plan) of deductible expenses.
The presence of this HRA doesn’t disqualify employees from opening and making or receiving contribution to a Health Savings Account because the HRA doesn’t begin to pay benefits below the statutory minimum annual deductible for an HSA-qualified plan.
In this approach, both employers and employees pay lower premiums, the employer-funded HRA helps high-utilizer employees pay their providers, and the Health Savings Account allows employees to pay the first dollars of deductible expenses at a 25% to 30% discount after tax savings.
This is the subject of a future column. A growing number of companies are seizing control of their healthcare spending by creating innovative networks, benefit designs, and reimbursement strategies. And competitive stop-loss programs allow smaller companies to benefit from this approach.
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