As you plan your strategy for employee health benefits, you probably focus on managing expenses through plan design changes such as higher deductibles and out-of-pocket limits, greater cost-sharing and premium cost increases. I’d like to challenge you to flip that paradigm. Consider covering more of the premium cost for your employees.
Sharing more of the premium reduces your plan costs
I propose that generous premium cost-sharing is a more effective strategy to create value for your employees and improve the economics of your plan.
My logic is simple. The majority of your plan costs come from a small number of people who have high claims. The more people on the plan, the more you can spread out your costs.
High-claim employees are unlikely to leave the plan. But healthy employees, who are essentially funding their high-claim colleagues, are more likely to decline coverage. They will choose whether to participate based on the premium. Then, healthy employees who declined coverage will often re-enroll if they get sick.
If you make your plan attractive with more generous premium cost-sharing, resulting in higher paychecks for your employees, you can capture more healthy employees. This spreads the cost of claims across a larger base and reduces your overall costs.
By contrast, normal expense-control tactics, such as raising the deductible, tend to drive people out of the plan, shrinking your base.
Consistent premium cost-sharing makes for better choices
I also suggest you share the same percentage of the premium cost across all your plans. This keeps you from inappropriately subsiding one plan over the other. And it allows employees to relate their cost more accurately to the value of the plan. It’s more equitable, easier to communicate and helps clarify choices for the employee.
A simple matter of math
Let’s say you’re a self-insured employer with $1 million in claims and have 100 covered employees. To respond to high claims, you raise deductibles and out-of-pocket limits. How many people will reach those amounts and really affect your expenses? How much will you get in real dollars from those changes? The answer is probably very little. In addition, you’re probably going to raise employee premiums. The shift may help your short-term budget but will most likely hurt you with future premium increases.
How? You will increase the financial pain for your employees, reduce the perceived value of your benefits and (most importantly) drive people out of the plan. Say 10 people decide to drop their coverage as a result. Now you have 90 people instead of 100 to share the costs of those high claims. Next year’s renewal will shift those costs back to you in the form of even higher premiums. You haven’t helped your bottom line at all.
Meanwhile, the healthy people who dropped will rejoin the plan when they get sick, perpetuating the downward, anti-selection spiral.
You may perceive that the changes saved you 10%. But in reality, you underfunded your costs by 10%, which could drive a 10 to 15% increase next year without any change in risk.
There’s just as much opportunity for improving your plan’s economics on the premium and cost-sharing side as on the expense management side. If you provide a good, well-supported premium, employees will appreciate the value of the plan as part of their total compensation. Healthy employees will remain in the plan, helping you reduce your long-term costs.
Let me know if you’d like to explore this paradigm shift further.
By Jim Clay, Vice President, Strategic Benefits Consultant, The Miller Group