Businesses offer health benefits to protect their employees’ health and financial future and to help recruit and retain a quality workforce. Employers must weigh the difference in cost and value of insurance plans to determine which meets their goals and budget.
Key considerations in balancing cost and benefits include:
- Premium sharing with employees. The more the employer pays, the more attractive the plan.
- The plan design. The richer the benefits, the more expensive the plan.
A primary purpose of insurance is to protect against catastrophic loss. It isn’t wise to overbuy insurance to avoid routine healthcare costs. That’s like buying auto insurance to cover oil changes. Many businesses and employees are too risk-averse. They pay too much in guaranteed costs – monthly insurance premiums – to prevent all potential out-of-pocket costs.
Another significant way small businesses can manage their costs is to get their employees involved in their own healthcare. Better awareness of costs and incentives to consider value will help employees make better healthcare decisions. This is the basis of consumer-driven health plans (CDHPs). According to www.businessgrouphealth.org, the aim of CDHPs are to reduce costs and improve quality by requiring consumers to take charge of their healthcare decisions.
Consumer-driven health plans start with two components:
- Leaner benefit plans, providing premium savings and leaving employees with additional financial exposure – and thus an incentive to consider health care costs and stay healthy;
- Some type of tax-advantaged funding mechanism, providing assistance in covering out-of-pocket costs.
There are two primary forms of CDHP. The first includes a high-deductible health plan packaged with a health savings account (HSA). These plans offer significant premium savings opportunities and “triple tax savings.” Both employers and employees may make tax-free contributions to the employee’s account. Interest and investment growth are not taxable, and distributions used to pay for qualified health expenses are also tax-free. The funds in an HSA do not have to be spent each year. The employee has immediate ownership of the funds, which she may spend to cover current out-of-pocket health expenses or saved and invested to cover future expenses.
The second form of CDHP includes a health reimbursement arrangement (HRA). HRA plans provide additional tax-free employer funding to help employees with out-of-pocket expenses. Many companies use this type of plan to assist in transition to leaner benefit plans, and they may use money saved on premiums to fund the HRA. The employer retains any funds not used for eligible healthcare expenses during the plan year.
The key to success with both types of plans is to communicate their value to employees and make them easy to manage. Tight integration between the health plan and account administration can greatly simplify the day-to-day process for both employer and employee.
To shop for insurance for your small business, the best sources of unbiased information are brokers, who can help businesses navigate the process and choose plans that provide the best value for you and your employees. Additionally, small businesses should always check with their legal and financial advisor prior to establishing a CDHP.
Steve Keogh is the regional sales manager for small group sales at Optima Health.