Why Employers Overpay for their Benefits Programs

Most employers tend to ignore tasks that are outside of their main business focus. While it is only human nature to put off doing things you dislike, it is not a good strategy for running a profitable business. It can be a particularly costly when it comes to your benefit programs – especially when you consider that, after payroll, employee benefits are your second highest business expense.

It is surprising how many employers overpay for their benefit programs simply because they do not take the time to determine if their business is receiving value for the dollars spent. As an employer, you should review your plan three to six months (depending on the size of your company) prior to the benefits renewal each year. Factors to consider include:

• Whether the program helps rein in claims by encouraging wellness and managing chronic conditions.
• If the claims to premium ratio is reasonable (small companies won’t be able to get this information, but sometimes it can be extracted).
• If the plan fits or exceeds employee needs.

Unfortunately, employers often skip this step. Instead, they concentrate on the increased cost of benefits in the annual renewal letter and on finding ways to reduce that cost. What they fail to acknowledge is that, without understanding how their employees use health insurance, it is impossible to know where to cut costs.

Avoid Employee Dissatisfaction

For example, simply raising the deductible or skinnying down the network will cause employee dissatisfaction and may reduce productivity. So, before doing this, it is a good idea to survey your employees and find out what is important to them. Many times, what the executives need is entirely different from what matters to the rank and file. How they use the plan is often different, too. You may discover that your company needs more than one plan to accommodate these different requirements.

Lowering premiums by implementing a high deductible health plan without educating your employees is likely to be a disaster. To avoid this, employers have two choices to consider:

• Offer a health savings account (HSA) so the employee or the employee and the company can fund the deductible and the employee becomes more cognizant of the cost of care (because the funds in the account belong to him/her).
• Use a Health Reimbursement Arrangement (HRA) whereby the employer self-insures the deductible and takes a tax deduction for the expense.

Self-Insurance

Another important consideration is self-insurance. Health insurance has three components: administration, risk protection, and claims. In a fully insured plan, an actuary estimates the amount of the claims for a group (or for small groups the trust they are put in) for the coming year. Premiums are based on these projections, regardless of whether the claims are incurred or not.

In a self-insured plan, information is gathered about the health of the participants, the actuary makes a claims projection specific to the group, and claims are paid as incurred. In some cases, if the estimated claims exceed the incurred claims there is a refund at the end of the year for a portion of the difference. Self-insured plans also include stop loss insurance, both for each employee and for the overall company. This protects the employer from high claims and runout coverage in case the plan is terminated and claims are submitted after the termination date.

Other reasons employers overpay include failing to keep current with what their competitors are offering; and working with the same broker year after year and not exploring new or more creative ways to approach their benefit package. Even worse, some employers don’t have a broker. If you buy directly from the carrier, you will never know what else is available or better priced because it is not in their interest to tell you.

In summary, employers who want to avoid overpaying for their benefit programs should be mindful of the following:

1. Not conducting an annual review to see what is and is not working.
2. Too much concern about the cost of insurance rather than what’s driving those costs.
3. Not surveying employees about their needs/interests and a lack of understanding of how employees use health insurance.
4. Implementing a high deductible health plan without helping employees pay the deductible. This will lead to higher claims and higher premiums because employees will put off care and simple issues will become larger claims.
5. Not realizing that HSAs do not make employees better healthcare consumers unless they are provided with education and assistance opening and funding an account.
6. Lack of awareness that a HRA (Health Reimbursement Arrangement) can fund a high deductible plan while only paying for claims incurred.
7. Not offering incentives for wellness programs or for those with chronic conditions to stay on track with their disease management program.
8. Failure to evaluate how to fund benefit programs, consequently paying for claims whether they are incurred or not.
9. Not taking advantage of the 50% tax credit in the Healthcare Exchange if they qualify.
10. Working with a broker who does not present all of the options available to them.
11. Not getting proposals from at least two other brokers to see if there are more competitive products/solutions available.
12. Not having a broker and believing they don’t need one.

Not sure if you and your employees are getting the most from your benefits dollars? Call us at 201-255-6239.

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