Every business owner ”“ and most employees ”“ is painfully aware of the seemingly unbounded increases in medical insurance costs. The compounding of double-digit cost increases year after year quickly results in a doubling of premiums. Ironically, many doctors still complain that they are receiving the same reimbursement for services that they were years ago.
The cost increases are partnered with an ever-growing demand for quality health care services in the U.S. As the baby-boomer generation ages and enters into retirement this demand will only increase. Whether this is fueled by a perception that quality health care increases life expectancy or simply by the abundant supply of health care services, utilization of the health care system continues to increase. If left unchecked, there is no apparent end to this growth and the spiraling increase in the costs that accompany it. However, as services become more costly and more of these costs are shifted to the consumer, their usage may start to decrease as consumers are forced to become more discerning about their utilization of services.
The increase in health care costs that almost all employers are seeing can be traced to factors such as increasing prescription drug costs ”“ and drugs make up a significant part of an insurance plan. Further, new medical technologies are very expensive and states continue to mandate new coverage, which costs more, to provide for each covered member.
As medical service costs rise for a carrier and if plan deductibles and co-insurances remain at the same rate, the carrier”™s cost increase is magnified, or leveraged. These increases are then passed on to businesses, which are forced to consider less traditional approaches to the health plans.
The current economic downturn has accelerated the need to reduce medical insurance costs. Every cost-reduction strategy involves employee participation. The best strategies only require learning new procedures, while more common strategies also involve more out-of-pocket costs for employees.
First and foremost, successful implementation of any strategies involves employee education. Using competent professionals to design and implement these strategies is highly recommended. New strategies include:
Changing to a plan with higher deductibles and co-pays and using some of the cost savings to fund a pool of money to reimburse employees for the higher deductibles and co-pays. This typically involves using a third-party administrator and issuing a debit card to employees that they use with health care providers. For groups with at least 20 enrollees, a common option is the use of the “difference card.” With this strategy, the employer”™s total cost and savings can be reliably projected.
Another option is the health reimbursement arrangement (HRA), which can be used for any number of enrollees. However, employer total costs and savings cannot be projected with this approach. Both options involve zero cost to the employee and can yield significant savings for the employer.
Another option is to change the plan to a combination of a high deductible health plan (HDHP) coupled with a health savings account (HSA). The HSA in a sense can be viewed as a “medical IRA” and has the benefit of funding employee costs on a pre-tax basis and avoiding tax if the funds are used for eligible medical expenses. Depending on the chosen HDHP and the amount of employer contribution, this approach will create varying amounts of employee cost.
In its best form this approach creates little increased cost for employees in poor health, and can serve as a retirement fund for employees in excellent health because (unlike the more traditional flexible spending account offered by many employers) the funds aren”™t forfeited if not used. In its worst form this approach creates significantly increased out-of-pocket costs for the employee in poor health, and an incentive to refrain from using health care services for healthy employees. Employer savings vary with either approach.
Progressive premium cost-sharing allocates more of the premium cost to higher paid employees. Relatively small increases in employee contribution can significantly reduce employer cost while causing only small changes in employee take-home pay.
Traditional plan design changes, including increasing co-pays, co-insurances and deductibles, tend to simply shift costs to employees. By introducing hospital co-pays first, fewer employees are affected. However, those few needing hospitalization will be affected at the most difficult time.
Joe Biegel, CFP®, J.D., works with Associated Benefit Consultants and is a financial adviser of Park Avenue Securities in Rye Brook, N.Y. Reach him at JBiegel@AssociatedBenefit.com.
