2021 Health Benefits: Get Smart About Controlling Costs Without Leaving Employees Exposed

by Marek Ciolko

For many employers, this is the time to start thinking outside the box, and take a closer look at alternative options on the market.

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In the midst of an economic downturn that no one could have predicted, the effects of COVID-19 have all of us looking to tighten our spending and get smart about how we manage costs. Ironically, one of the most impactful cost levers available to employers is employee health benefits. Health benefits are often one of companies’ biggest expenses, often second only to employee salaries – higher than rent, equipment and others. Decision-makers find themselves at a crossroads – wanting to do well by their employees as we face a global pandemic that threatens our wellbeing (not to mention retain high-quality talent), while navigating the reality of a potential recession and determining what spending to prioritize and where to tighten and reduce costs. 

To complicate things even further, the possibility of the “second wave” of infections in the fall and over the winter season, combined with the potential for a spike in elective procedures that have been delayed, are causing many health insurance carriers to consider higher than usual rate increases for next year. And that’s on top of already unsustainable rise in  healthcare spending, much of which is driven by increasing price for specialty drugs and hospital stays (at rates far exceeding the rate of GDP growth, or  inflation). This year, more than ever before, employers can’t afford to just stick with the status quo health benefits solution that’s been put in front of them year after year.

For many employers, this is the time to start thinking outside the box, and take a closer look at alternative options on the market. These new solutions will often allow them to be smarter about their spend and how they offer their employees the right health benefits to move beyond the old game of tweaking benefit designs, raising deductibles, and reducing coverage.  These employers feel the weight of the responsibility to identify solutions that work for their budget, without leaving employees exposed.

Evaluating Your Options

Employers have a number of options when it comes to health benefits models, including:

  • Fully-insured group plans, also known as the traditional group model: It is by far the most prevalent model, especially among the small and mid-sized businesses, and it involves purchasing a fully-insured policy from a health insurance carrier. My colleagues at Gravie and I call this the “grin and bear it” approach. It offers predictability and safety because the insurance carrier assumes all of the risk, which makes it seem more affordable. However, as I mentioned earlier, the price trend, and the lack of flexibility that these plans offer put many employers in a tight spot. Additionally, in the case of most for-profit insurance carriers, these plans are designed in way that expect you to spend more than you use, which is why many carriers offer generous incentives to brokers to market these plans.
  • Self-funded health care, also known as Administrative Services Only (ASO): In this case, the business assumes the bulk of its own medical claim risk, with stop-loss coverage to protect against low-probability, high-cost medical events (with the limit, called the attachment point, usually set a vary high dollar level). It is a typical model for larger companies (think employers with 1,000+ employees) that have a big enough balance sheets to absorb the month-to-month variations in claims spend, and the employee base large enough to make it easier to accurately predict the medical spend. Employers take on the risk and also reap the rewards and savings if claim amounts are lower than what collective premiums would be.
  • Level-funded plans: Level-funding combines the ASO model described above with more comprehensive stop-loss coverage that kicks in at a relatively low threshold. It provides some of the predictability of the traditional group model with the benefits of self-funding, allowing employers to budget for a fixed monthly expense that covers the employers anticipated medical claims liability, and the premium for stop-loss coverage. Employers are not responsible for any medical claims beyond their monthly budgeted liability, which gives them predictability of expense similar to fully insured health plans. Level-funding is a popular approach for many small- to medium-sized businesses that would not be able to adopt a pure ASO model. One additional perk of level-funding is that it allows small businesses comprised of relatively younger, healthy employees, that are subject to community rating (under full-time 50 employees in most states, and under 100 in CA, CO, and VT) to take advantage of lower cost offered by self-funding. And with providers like Gravie, employers have an opportunity to get money back at the end of the year if the amount paid in monthly fees exceeded the amount paid in claims and expenses. This insurance option aligns the incentives between the provider and the employer, and employers are able to share more of the reward for their risk.
  • Individual Market— In this option, employees buy their own coverage from insurance carriers that offer products in the individual health insurance market, with some level of financial support from their employer. Since employers cannot legally be involved in the insurance purchasing process, it essentially divorces the employer subsidy amount from the actual cost of coverage, allowing businesses to establish a defined contribution framework for their employee healthcare benefits. Prior to this year, employers who chose this option simply increased their employees’ salaries by however much they wanted to help them pay for their health insurance. Unfortunately, that route makes those funds subject to all the taxes that are imposed on employee compensation (payroll, FICA, etc.) Starting this year, employers can take advantage of the Individual Coverage Health Reimbursement Arrangement (ICHRA), which allows them to contribute these dollars on a tax-advantaged basis. Additionally, any amounts that employees have to pay beyond the employer’s contribution can be deducted from their payroll on a pre-tax basis. A benefit of this option that more employers are paying attention to nowadays is that these plans are portable – if individuals face layoff or unemployment, they can still take their plan with them and avoid exposure during a crisis, while helping employers to avoid the potential liability associated with providing coverage under COBRA.

There are also two major options for how employers choose to finance employee health benefits:

  • Pay a portion of the cost–this is the camp that most businesses fall into, sometimes because there’s a general lack of awareness of alternative options. Typically, employers will pick one or two traditional group benefits plan options, and cover all or some of the premium, with the remaining costs going to the employee. As rates increase from year to year, employers have the choice to keep paying for the same plan or choose higher-deductible, lower-coverage plans that are more affordable. They can also choose to cover a smaller portion of the premium, which translates into higher costs being passed on to their employees and might impact their ability to meet enrollment minimums imposed by the carriers. Essentially, we’re left choosing between quality or affordability. In most traditional group options, the employer is both the financier and the purchaser of coverage.
  • Defined contribution model – A newer model, defined contribution, allows employers to set a fixed pre-tax budget per employee they can use to shop for health benefits that meet their needs. It alleviates the burden on employers to select a one-size-fits-all plan, while allowing them to control costs in a way that doesn’t affect the quality of the plans that employees choose from. In this scenario, when working with a provider like Gravie that guides employees through their plan designing or buying experience, the employer moves to a role of simply co-financing – a preferred spot for many executives.

So How Do You Choose?

While there are a number of considerations to look at, three of the most important factors to consider are:

  • Cost – Both for the employer and the employees. For the employer, consider the plan premiums, hidden fees, potential penalties, taxes and administrative burden (time is money). For the employee, make sure to look at plan premiums, deductibles and copays, ancillary products or services like dental, vision, life and more, costs of expected out-of-network needs, the burden of coverage questions, billing concerns and health finance management. If you’ve only tried one route, such as traditional group options, now may be the time to get a quote from other partners who can design different plans around your needs.
  • Flexibility – The uncertainty we all are facing right now in a global pandemic and a potential national recession will emphasize an increased desire for flexibility as opposed to tight contracts and limited options. Consider what’s most important to your team from a flexibility standpoint – being able to adjust your contributions from year to year, allow employees to seamlessly switch between coverage options, the ability for employees to take benefits with them when they go, and so on.
  • Support – This is often one of the last things we look at but it’s critical, especially as healthcare becomes more complex. Does your partner offer regular check-ins, easy-to-understand reporting, digital portals for employers and employees to access account information, or ongoing consulting and support to make the best decisions for your team and your budget? Having an expert in your corner this year is increasingly valuable.

While it’s an uncertain time for many businesses, I believe that this uncertainty will reward business leaders who look for new solutions for their business and their budget, rather than stick with the status quo. And necessity will continue to be the driver of innovation across the industry. As the open enrollment season approaches, I encourage all my peers to get curious and take a look at solutions that they may not have considered in the past.  This may end up being the best thing you do for your team this year.

Marek Ciolko is the CEO and co-founder of Gravie.