Trends & Developments - Oct. 2011 - Healthcare Cost Strategies: Innovations That Can Help Your Company’s Bottom Line
Healthcare costs are skyrocketing and companies large and small are feeling the pain. In fact, in 2011, the average increase in health care premiums was triple the rate of inflation, according to the latest survey from the Kaiser Family Foundation. Since 2000, premiums have risen over 87 percent. In order to attract top talent, companies need attractive choices for their benefit plans along with compensation. With benefit costs being the second highest expense next to salaries, today’s businesses are seeking solutions to the constant rise in premiums.
With the passage of Federal Healthcare Reform (the Patient Protection and Affordable Care Act, passed 3.23.2010), CFOs and HR professionals know the risks to the employer have increased. The new tax implications as well as new compliance and reporting requirements regarding benefit designs, employee contributions and communication to employees must be carefully considered. These new compliance and reporting requirements, if not followed, can result in stiff penalties to the employer. Over the course of the next several years (up to 2018), segments of the new healthcare legislation will be phased in and thousands of pages of new regulations are expected.
Three of the leading causes of the rise in healthcare costs are: 1) higher utilization (more frequency of visits and tests prescribed), 2) technological advances, i.e., new drugs and complex procedures, and 3) new mandated minimum benefits to be covered by insurers due to Federal Healthcare Reform, i.e., dependant coverage to age 26, mental health coverage, emergency services, etc.
As a result of all of these pressures, choosing a health plan that meets the majority of needs for employees can be a highly risky and uncertain process. Organizations should work with their employees by surveying their needs before choosing and implementing a benefit plan. While it can be a struggle to make everyone happy, a survey can remove a lot of the guesswork. In order to be useful, the survey should be short and the questions clearly stated. Many companies can find ways to save money based on the feedback received from the surveys. For example, some companies are in industries that attract a younger workforce. Therefore, those employees might not mind paying a higher co-pay for seeing a specialist because the need is infrequent. The employer realizes the savings without depriving the employee. In addition, to maximize the value of the healthcare benefits package, companies should hold educational meetings to guide employees on what the package’s offerings are, how they work, and how to maximize their benefits and reduce their out-of-pocket costs.
Healthcare reform will be continuously evolving over the next seven years but employers must be concerned with how to address delivering healthcare and affordable benefits to their organization today. Company benefit costs can be reduced by offering newer innovative plans designed around the consumer.
There are several good new benefit options that are now becoming more mainstream. These plans address the need to minimize higher benefit premiums for companies. The new programs, Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs), are a tax-advantaged and cost-effective means to pay for certain out-of-pocket expenses. HRAs are funded by employer contributions and allow employers to provide funds on a monthly basis to accounts employees can use to pay for deductibles and other out-of-pocket expenses not covered by their health plans. The unused portion of funds in an HRA at the end of the plan year remains with the employer. The unused monies can be allocated to help fund future medical expenses and retiree medical costs.
A Health Savings Account (HSA) is a tax-sheltered savings account that is driven by employee and/or employer contributions and is similar to an IRA, but earmarked for medical expenses. Deposits are 100% tax-deductible and what is not used from the account each year stays in a secure trust and continues to grow interest on a tax-favored basis that can supplement future medical expenses or retirement. These funds are not subject to tax, as long as the rules regarding the HSA funds are followed. At age 65, the funds can be withdrawn for any purpose without penalty and are subject to normal income taxes. HSAs require the employer to offer a Qualified High Deductible Health Plan. By changing to a High Deductible Plan, the premium can be reduced 20-40% compared to traditional plans that offer first dollar coverage on all benefits through co-pays. One benefit to the plan sponsor (employer) is that this will allow them to lower fixed costs (premium) and still provide for necessary protection. This premium savings can allow employers to provide funds towards a portion of the new deductible with an HRA, HSA, and/or flexible spending account. This funding minimizes out-of-pocket claims costs; generally it will also reduce the employee contributions towards their premium contributions.
Other rules apply to HSAs and HRAs, so companies should check with their benefit advisor. An advantage to both the employer and the employee is that these innovative plans, coupled with a Qualified High Deductible plan, have significantly lower premiums, benefitting both employee and employer; healthier employees who do not make frequent doctor visits will realize even greater savings. Companies now have the ability to offer a Qualified High Deductible Plan in conjunction with an HRA or an HSA, and also offer their employees a comprehensive plan.
Lastly, company’s upper management need to be proactive, involved in the process early, and completely engaged in the choosing of the right health plans relate to their overall strategic plan. This will allow time to review budget, cash flow and all options from all benefit offerings so they can determine best premium contribution strategy. A good rule of thumb is to start reviewing the options for benefit packages 120 days out from the renewal date. The sooner an organization knows where they stand as far as the increase, the better. This gives employers the necessary time to redo a census (data gathering about the company’s current employees) and explore the market to see where they can best be positioned.
One tip: It is crucial for a company to have a Benefit Advisor to guide them on reform requests and evaluate the risks and opportunities. They understand the marketplace and are in constant contact with the carriers. They also can navigate current opportunities to incorporate the programs mentioned above and develop strategies that can control costs and provide the flexibility to suit the company’s needs. In addition, due to new laws and regulations, it is also important that clients consult with their CPA on tax implications and their attorney for new compliance requirements.
Onofrio Cirianni is a partner in EisnerAmper Financial and Insurance Services LLC. For more information, you can contact Onofrio at 908.429.0025.
Trends & Developments – October 2011