The current health insurance marketplace can be difficult to understand and navigate, especially since it seems to always be changing from year to year. Mike Ward at Insight Performance discusses how employers can develop successful strategies in this podcast.
John: Hi. I’m John Maher and today I’m here with Mike Ward, President at Insight Performance, a human resources and employee benefits consulting firm based in Massachusetts with offices in Dedham and Danvers, and today we’re talking about current health insurance marketplace and employers’ strategies. Welcome Mike.
Mike: Good morning.
Current Health Insurance Marketplace for Employers
John: Mike, what is the current health insurance environment like for employers?
Mike: Well, we’re seeing a time of rising trends. Whereas the past few years we saw a low single digit increases, we’re seeing trends right now in the eight to nine, nine and a half percent range. These are driven mostly by significant increases in prescription drug costs, because of blockbuster drugs and drugs that are on patent protection, as well as increased utilization. When the economy does better, people tend to get services versus when the economy is not doing so well because of their out-of-pocket expense. We’re also seeing [that] the health insurance [companies] themselves are struggling. For the first half of this year, net operating income from operations is actually down for every carrier in Massachusetts through the first half of ’16. Then lastly, we’re seeing employer groups struggling with the challenges of the Affordable Care Act, whether it’s managing their eligibility, complying with the reporting requirements or just meeting the affordability challenges that presents.
How Employers Can Manage Costs and Offer Employees Competitive Benefits
John: Okay. What are employers doing to manage costs while still trying to offer competitive benefits?
Mike: Well, the first thing they’re doing is looking at their what they’re offering for benefits and have planned design strategies. What we’re seeing a lot is employer groups that are introducing high-deductible plans or increased coinsurance for employees. In a way, its cost shifting some of those expenses to employees but it’s reducing the premium costs for the company. We’re seeing a lot of companies now offering multiple plan designs to their employees to choose from various plans.
One reason for that is to meet the affordability requirements of the Affordable Care Act because an employee’s portion of the premium cannot exceed nine and a half percent of their gross income. By offering a low option plan that provides those employees with access to a plan that will satisfy that requirement for the company. The last reason is that work forces are so diverse today and we have the baby boomers, we have Gen-X, we have millennials, and each has different things they’re looking for in a health plan. So by offering multiple health plans, you’re kind of meeting the requirements or the desires of each one of those populations. Along with that, [companies] versus contributing a percentage of the premium are going to flat dollar amount. Then they’re saying to their employees, “You choose the plan that’s right for you.” If it’s a more expensive plan, the employees will pay more. If it’s one of those less expensive plans, the employee pays less and that’s definitely a trend.
John: Right, so that caps the amount that the company has to pay and then they’re able to project maybe a little bit better about what their expenses are going to be.
Mike: It helps still deal with the rising costs for the employer group and they do need to peg what their expense will be given their budgets. The other thing we’re seeing a lot is even a real expansion in wellness and disease management initiatives by employers and tying incentives to the wellness plans. Employer groups are saying their employees, “If you participate in our wellness program, you will get decreased premium deductions or there might be other benefits like credit cards or different prizes.” The reason being is they’re trying to drive more healthy populations which should overtime impact their claims and hopefully reduce the premiums.
John: Okay. Can you explain a little bit about the different funding strategies?
Mike: Alongside of these plans that have higher deductibles and increased co-insurance, there are tools that employers offer to their employees to help deal with that cost. First and probably the most common and used for quite a long time is flexible spending plans that are done through Section 125. Basically, there is a medical account where an employee can put aside monies pre-tax to help pay for those co-payments or deductibles or things that aren’t covered by the health insurance. It’s a tax advantage because it’s done pre-tax and the employee is saving money. The employer is also saving on the FICA tax for that. That’s been used for a long time.
Another vehicle that employers use is the HRA or Health Reimbursement Arrangement, which is through section 105 of IRS Code and with this, it’s all employer funded and it is a pay-as-you-go or an unfunded promise to pay from the employer to the employee. An example is they set up a plan with a $2,000 deductible and they say to their employees, “Well we’ll fund half of that for you if you incur these expenses they’re subject to the deductible. We will reimburse you for half of that.” It’s done on a tax advantage basis for both the employer and the employee and that was introduced in 2002 and it’s become a very popular way of supporting their health insurance plans.
Mike: Another way that isn’t as much funding but benefits that are being offered that are becoming very popular are, and they are usually voluntary or employee paid are critical illness or accident insurance. Basically with a high-deductible plan, employees sign up for a critical illness or accident benefit, where they’re actually reimbursed if they incur certain expenses through a limited value medical plan. It kind of bolts onto their existing plan.
Health Savings Account (HSA)
John: So Mike there’s a lot of buzz in the news about HAS’s. Can you tell me a little bit more about that?
Mike: Sure. HSA is a Health Savings Account. These have been popular in other parts of the country but they’re starting to become more popular in the New England area. Basically these are health savings accounts and operate alongside certain high deductible health plans. There are some limitations in plan design, there are some restrictions as far as how those plans are structured, but they do have some great advantages. First and foremost, it does lower the premiums for the health plan significantly by introducing a high-deductible plan right off the bat that reduces costs for both the employer and the employee.
But then there are certain tax advantages that you cannot replicate with any of these other funding vehicles. Any money that the employee puts aside or the employer puts into the plan for the employee is done so on a pre-tax basis. Then the monies grow on a tax-free basis and then when they’re taken out of the account to be spent on medical expenses, they are also taken out tax-free. There’s really a triple advantage to having Health Savings Account from a tax standpoint. The other thing about these accounts is they can be rolled over from year to year. A lot of employees or people from a financial planning standpoint will fund these accounts not spend the money out of them, [but instead,] just pay for their cost that are subject to the deductible and grow their accounts over time because of these tax advantages. Then in the future save and maybe use them for Medicare or some other type of medical expense that they’re going to have down the line.
The one thing that employers need to keep in mind with this though, unlike the health reimbursement arrangement which is a promise to pay an unfunded account, these are funded accounts and the employees own the monies that the employer puts in from day one. It’s 100% vested right off the bat.
John: Okay. So all of these are strategies that can be offered alongside both fully insured and self-insured health plans, can you explain how self-funding works?
Mike: Sure. We’re seeing self-funded plans become more and more popular because of the Affordable Care Act also because of the rising cost of the health plans to employer groups. Historically, we saw a lot of companies with 200 or more employees opt to be self-insured and the reason being is it’s manageable [and] they realize that they can spread their risk along a lot of different employees. We’re now seeing that companies with as little as 50 employees are looking to self-funding as a potential option for the way to fund their health insurance plan. The way it works is versus being fully insured where you pay a set premium every month to the insurance company who then takes on all the rest of your employees for all the claims and everything that happens.
In a self-funded model, the employer actually pays their own claims, they hire [an] administrator and most likely it is an insurance company that they’re already dealing with and they purchase stop-loss insurance to protect the downside for many catastrophic claims. The employer does take on risk or more risk with a self-insured arrangement with their insurance company. However, there are certain advantages. First and foremost a lot of the fixed cost [reduction]. Right away, the risk that the health insurer will charge a company is taken out of the equation [and] that typically saves about two to three percent versus premium. They also were able to get out a certain state in Affordable Care Act taxes which also result in another 3%. Right off the bat there is about 5% in fixed cost savings by being self-insured. There’s also flexibility with plan design and if the multi-state they can use various networks there’s the potential for improved cash flow and then of course transparency. They have a better understanding of how their employees are using the plan and what kind of claims they’re incurring so it helps manage the program.
John: All right well thanks again for speaking with me today Mike.
Mike: Thank you very much.
John: And for more information you can visit https://insightperformance.com/ or call (781) 326-8201.