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Containing the Cost of Health Insurance Benefits

Mark Brouse, Vista Staffing Solutions, Inc.

According to a report released in September 2005 by the Henry J. Kaiser Family Foundation, employer-based health insurance premiums have increased 73 percent in the past five years. Over the same period, the percentage of businesses offering health insurance to their workers has declined steadily.

Clearly, the decision to offer employee health benefits – as well as what kind and how generous – is tough for any business owner. In approaching the issue, the first question an entrepreneur should ask is where health benefits fit into the culture of the organization.

The answer largely depends on the kind of bond the entrepreneur wants to create between the company and its employees. Health insurance benefits can be an effective recruitment and retention tool for organizations facing stiff competition for talent. Indeed, for many people, the quality and size of that benefit is a determining factor in where they choose to become engaged as an employee. Conversely, in industries where low skills and high turnover rates are the norm, health benefits should probably not be a big part of employee compensation expenses.

Either way, here are some strategies any entrepreneur can consider to contain the costs of providing health insurance to employees:

Offer Wellness and Fitness Programs

I believe this is the most important thing you can do. Money spent on wellness and fitness programs – which tend to be relatively inexpensive – is money well spent. It’s hard to see the difference these programs make in small groups, but on the whole you end up with a healthier population that uses fewer benefits and lowers overall costs. You can start with something as simple as hosting a Weight Watchers or stop-smoking program. These programs have a huge emotional impact as well because employees see them as a more personal investment in their well being.

Build a Relationship with an Independent Group Health Insurance BrokerThis is someone with a lot of industry experience who specializes in group health insurance and has access to a wide variety of products. My company started with five people in our group and now has 150. We’ve been with the same broker for sixteen years. The best way to find a broker is to contact other small companies in your area and ask for referrals. You can also ask your personal financial advisor to suggest individuals they know and trust.

Help Employees Make Informed Buying Decisions

There’s a real lack of sufficient information for consumers to make truly informed buying decisions. Still, anything you can do to get employees engaged in thinking about the cost of health care they receive will help to control costs. The hottest product now out there to do this is consumer-directed health insurance. Essentially, these are programs with high deductibles ranging from $1,000 to $10,000. They allow entrepreneurs to make an early entry into group health insurance programs – covering catastrophic events at a minimum – without incurring extraordinarily high costs.

Offset Employee Deductible Costs

Traditionally, if you wanted to provide a high level of benefits, you would buy a low-deductible plan at high cost to your company. The beautiful thing about consumer-directed health insurance programs for small companies is that they offer flexibility. They’re less expensive for companies and, at the same time, can be paired with programs that offset costs for employees:

  • Health Savings Accounts – Health Savings Accounts (HSA) are individual IRA-type accounts that can be used to pay qualified medical expenses not covered by insurance, including deductibles and other out-of-pocket expenses. Individuals can make contributions to an HSA on a tax-free basis. Interest accumulates in the account tax-free and money in the HSA that is used for qualified medical expenses is not taxed. If employees leave an employer for any reason, they can take the HSA with them.
  • Health Reimbursement Accounts – A Health Reimbusement Account (HRA), which is what our company uses, is an employer-contributed program that allows the employer to purchase a less expensive group plan. Reimbursements are tax-free to employees, who can use money in these accounts to pay deductibles and out-of-pocket medical costs. They can also roll unused funds over to future years and take the account with them when they change employers or retire.
  • Cafeteria 125 Plans – These plans allow employees to set aside pre-tax money for health care and other types of dependent care, such as day care, but cannot be rolled over and are not portable.

Lease Employees from a Professional Employer Organization

An increasingly popular strategy some entrepreneurs are choosing to manage health care costs, as well as other human resource functions, is employee leasing. Under these arrangements, employees are employed by a Professional Employer Organization (PEO). The PEO provides them with a full range of benefits and leases them back to the entrepreneur for a fee. This puts the employees into a much larger employee group, which may have access to less expensive health insurance programs.

Consider Benefits Trends

The trend with prescription drug coverage is toward increased employee participation in the cost. In mental health, we’re seeing more use of prepaid Employee Assistance Programs (EAPs) that encourage employees to seek early intervention to prevent problems from escalating into more expensive conditions. Dental insurance is a fairly competitive market, so costs have remained relatively stable. Vision care is a good example of a benefit that can be covered by an HRA, HSA, or cafeteria plan.

To these observations and cost containment strategies, I would add these three recommendations:

  • Choose a health insurance company, and stick with it. Loyalty can pay off in lower premiums in later years.
  • Choose a program that ties employees more closely to the cost of care by including a component of employee spending on the front end.
  • Don’t let preconceived ideas keep you from offering alternative plans to employees. For the longest time, we wouldn’t offer anything other than a $100 deductible insurance program. When we finally offered a managed care option that cost us a whole lot less, many people chose it because they liked the $10 or $15 co-pay.

Health care benefits top the list of expenses many entrepreneurs find difficult to manage, but that doesn’t mean there aren’t ways to make them not only affordable but integral to what keeps employees loyal, motivated, and productive.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

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