Spousal Surcharges: Are They Right for You?

With health insurance premiums continuing to rise, many employers are looking for new ways to decrease costs.  Spousal surcharges (which charge more to spouses who can be covered through their own employer) and carve outs (which kick such spouses off the plan altogether) are an increasingly hot topic, but are they right for your health plan?

The short answer is, it depends. Spousal surcharges and carve outs can have a substantial impact on costs, but not always in the way you thought.  Here is a quick look at some of the potential pros and cons of a surcharge or carve out, as well as some alternative cost-cutting measures to consider.

Dangers of Excluding Spouses

Spouses can be some of the most expensive participants in employer-sponsored health plans, which explains why many employers consider excluding them as a way to reduce costs. However, there are potential financial drawbacks to consider. When companies “carve out” or add a surcharge to exclude working spouses, plans are left with spouses that are too unhealthy to work, are retired but not on Medicare, or are not eligible for their own employer health coverage for some other reason.  The first two groups are the most concerning, as they tend to be the most expensive spouses on an employer health plan.  Strategies that discourage working spouses essentially create a high risk pool of spouses – where the average spouse on the health plan has more claims than spouses in general.  Additionally, with fewer members on the health plan to help offset costs, high claimants have more of an impact on the performance of the health plan as a whole.

The result?  For fully insured clients, if the carrier does not increase employee + spouse and family rates in the first year of a spousal surcharge/carve out, you could experience a large increase at your next renewal and large swings in premium pricing in future years due to claim volatility.  For self-funded plans, failing to adjust rates appropriately to account for the higher average costs attributable to spouses could result in a shortfall in premiums and a funding deficit in at least the first year.

Recruitment and Retention Concerns

Benefits is not just a line item; it is an extension of your company’s culture, and a recruitment and retention tool.  If the company culture is pro-family, for example, intentionally excluding members of an employee’s family may send the wrong message.  Additionally, charging actuarially appropriate premiums may be considered too expensive for employees.

If you are one of the only employers in your area/space that has a spousal surcharge or carve out, it could put you at a disadvantage in hiring and retaining employees.  This is especially true with the current low rates of unemployment.

Final Word

With proper planning, the decrease in employer costs resulting from a spousal surcharge or carve out may still be enough to offset the risks, depending on how you set your cost sharing.  Instead of driving working spouses (who tend to have lower claims) off the plan, you could consider increasing your employee cost-sharing to offset the added cost of the spouse.  By setting cost-sharing at rates that are reflective of the actual spousal risk, you can collect adequate premium to cover costs, have more competitive spousal rates, be less likely to have large swings in health plan expenses, and not appear to be taking a benefit away from employees.

It is important to fully understand the implications of a spousal surcharge or carve out, on direct and indirect costs, in current and future years, before moving forward. Working through these issues with your broker before implementing a strategy will help you avoid a potentially adverse impact on your costs in the long run.