4 Common Mistakes Driving Your Health Insurance Costs

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

4 Common Mistakes Driving Your Health Insurance Costs

#1 -The Wrong Plan Design

People ask me, “so what’s the RIGHT plan design?” The right plan design is one that appropriately matches your risk. I cannot tell you the number of companies out there who waste thousands, even hundreds of thousands of dollars each year on health insurance plans designed to cover risks that are only likely to occur in between 2-5% of the population. It is in this area that I see the biggest opportunity for companies to impact their costs. Often business owners will select plans based on employee perception of “good health insurance” instead of going the extra step and assessing the true risk, selecting plan designs based on that assessment, and then educating employees to illustrate the time, effort and research that went into making those selections. Once employees understand that the company actually took the time to complete this step rather than just looking to cut costs without any regard for employee impact, you typically see a lot of head nods and comments from the majority of employees agreeing that they really didn’t spend a whole lot on medical costs the past year. We would all love to have $0.00 deductible health insurance with no co-pays, but the reality is most of us only dive into our deductible a few hundred dollars, if that, each year. The majority of employees are more likely to utilize office visits, lab and prescription benefits in their health plan and so that’s where the bulk of financial burden actually resides. Many employers make the mistake of designing their plans around the exceptional risk versus the most likely. It’s called risk management for a reason and a good benefits broker/advisor should be helping you to identify and accomplish it.

#2 – Only Offering One Plan

When you create a benefit program that allows employees to be flexible in their decisions, it creates a win-win for both employers and employee and creates an opportunity for employees to engage in the same process as the company. They have to make a choice – based on one part financial, one part medical need. Not only do you create “skin in the game” for the employee, but it affords you the opportunity to be more creative in your contribution strategy. By limiting the choice to one plan you may be paying for an option where a lesser plan would suffice and even be welcomed both in terms of coverage and price point. This strategy allows employers to base their contributions off of the lower cost option and allow employees to buy-up to a richer plan option. For this strategy to be effective I encourage employers to work with their advisors in educating employees about the various plan options and perhaps even offering incentives that will motivate employees to participate in the lower cost option.

#3 – The Wrong Contribution Strategy

How much you choose to contribute toward employee benefits is a strategy that should be determined upon consideration of other factors at play in the company. What is your annual turnover rate? Is it higher in one area than in another? What is turnover and training costing you? Who are your strongest and best employees? Are they the guys with young families? What is your growth strategy? Do you have one? If so, what kind of employees are you going to need in order to get you there? What are you going to have to offer for them to choose you over your larger competitors?

Smaller employers, sensitive to costs have a history of viewing benefit contributions as one-dimensional. They pay 50% of the single employee premium and any remaining costs are the responsibility of the employee. Designing contributions in this manner leaves many of the more mature, responsible employees, often the ones with mouths to feed and the ones whose loyalty to you is the greatest, out in the cold. Investing more in the loyal, responsible segment of your employee population can add considerable value for you in other areas by stabilizing the workforce, improving employee morale where it matters most and ultimately helping you get a leg up on your competitors. An experienced broker/advisor can assist in designing a contribution strategy that compliments some of your greater operational objectives without breaking the bank.

#4 – The Wrong Funding Arrangement

When it comes to covering the cost of health insurance, “fully insured” or “self-insured” refers to the manner in which the employer’s risk (cost of paying claims) will be insured. The volume and severity of claims a company is likely to incur is a projected cost based on a complicated formula designed by actuaries and underwriters, but because it involves humans and their use of healthcare, it is ALWAYS a variable cost. No one, not even the insurance company knows with absolute certainty how many claims an employer will incur in a year, or what their total cost will be. Simply put, in a “fully insured” environment, an underwriter projects what a company is likely to incur in the way of claims, sets the premium amount to reflect a preparedness to take on all of that worst case scenario risk and if claims come in better than projected the insurer retains unused premiums as profit.

For employers who may be considering it for the first time, the term “self-funding” can be scary because it’s often misunderstood as an arrangement whereby the employer is on the hook for all claim expenses. However, that’s not the case in the majority of plans out there today. In a partial self-funded environment, underwriters still project what the variable costs will be. These costs can fluctuate and so with the help of an advisor employers purchase stop-loss coverage (insurance) to protect against two different types of catastrophic issues.

Specific Stop Loss – refers to the insurance an employer purchases to cover any expenses that exceed a pre-determined dollar threshold on any one individual claim, for example – $15,000.00
Aggregate Stop Loss – is the insurance that covers the employer should his total claims expenses exceed a certain dollar threshold, say $500,000.00.

In a self-funded arrangement, if claims come in better than expected at the end of the year the employer shares in the dollars saved on paying claims which he can then use to offset his ongoing health insurance costs. A strategy once reserved for larger employers, the concept of partial self-funding has evolved in the face of the Affordable Care Act (ACA) and is growing increasingly popular as a viable cost-containment solution for employers with as few as 30 employees. Talk to your broker/advisor about whether this might be a good fit for you.